Physical capital, knowledge capital, and the choice between FDI and outsourcing

Physical capital, knowledge capital, and the choice between FDI and outsourcing

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Article ID: iaor2012691
Volume: 45
Issue: 1
Start Page Number: 1
End Page Number: 15
Publication Date: Feb 2012
Journal: Canadian Journal of Economics/Revue canadienne d'conomique
Authors: , ,
Keywords: production, knowledge management
Abstract:

There exist two approaches in the literature concerning the multinational firm’s mode choice for foreign production between an owned subsidiary and a licensing contract. One approach considers environments where the firm transfers primarily knowledge-based assets and assumes that knowledge is non-excludable. A more recent approach takes the property-right view of the firm and assumes that physical capital is fully excludable. This paper combines both forms of capital assets in a single model. There are subtleties, and added structure is needed to establish what ex ante seems a straightforward testable hypothesis: relatively physical-capital-intensive firms choose outsourcing while relatively knowledge-capital-intensive firms choose FDI.

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