Complementarities between Outsourcing and Foreign Sourcing

Abstract

We examine the strategies of …rms that face an array of organizational choices. Each …rm must acquire intermediate inputs and assemble …nal products. It can perform these activities internally or externally, and at home or abroad. We study the relative prevalence of various organizational structures in industries that dier in …xed organizational costs when …rms in each industry dier in their productivity levels. We identify conditions under which outsourcing and foreign sourcing are positively correlated across industries. This correlation results from two sources of complementarity between outsourcing and foreign sourcing.