Outsourcing and Technological Change

We present a dynamic model where the probability of outsourcing production is increasing inthe firm’s expectation of technological change. As the pace of innovations in productiontechnologies increases, the less time the firm has to amortize the sunk costs associated withpurchasing and adopting new technologies to produce in-house. Therefore, purchasing frommarket suppliers, who can afford to use the latest technology, becomes relatively cheaper.The predictions of the model are tested using a panel dataset on Spanish firms for the timeperiod 1990 through 2002. In order to address potential endogeneity problems, we use anexogenous proxy for technological change, namely the number of patents granted by theU.S. patent office classified by technological class. We map the technological classes to theSpanish industrial sectors in which the patents are used and provide causal evidence of theimpact of expected technological change on the likelihood and extent of productionoutsourcing. No prior study has been able to provide such causal evidence. Our results arerobust to the inclusion of detailed characteristics of the firms as well as firm fixed effects....