Outsourcing, Information Leakage and Consulting Firms

Abstract

This paper offers a general equilibrium model to analyze the problem of R&D investment of firms that also face the decision between outsourcing and in-house production in the presence of R&D information leakage. A contractor hired by a firm learns the firm's technology and can diffuse the information to other firms, either by selling it or by "spilling" it involuntarily. I find that information leakage concerns tend to concentrate the outsourcing market with respect to a situation in which information leakage is not present. In particular, despite the fact that the original outsourcing market is perfectly competitive, I find that when a market for information arises in equilibrium, such a market is always monopolistic. I show that a market for information arises when contractors have a positive but low degree of control on the information they hold. If contractors do not have any control on the information they hold, the market splits into a positive measure of technologically advanced firms that never outsource and a positive measure of low-tech firms that always outsource. If contractors have full information control, all firms invest in technology and outsource, and a market for information never arises. The structure of the equilibria of the model captures several features observable in the management consulting industry.

Information and Knowledge Leakage in Supply Chain

“…Several studies (Ho, 2009;Baccara 2007) found that outsourcing activities, especially In addition, both studies argued that there is a great potential for organisations to lose their critical skills and competitive advantage to competitors when collaborating extensively in supply chain management and forging strategic outsourcing (Bonte and Wiethaus, 2007;Faisal et al, 2007). In addition, traditional cost consideration in strategic outsourcing is no longer the main concern because the measures needed to retain a firm's competitiveness principally to protecting its ability to compete in the rapidly evolving market conditions are more important to them (Bonte andWiethaus, 2007).…”

“…Trott (2006a and2006b) claimed that legal contracts may only offer shortterm protection to a firm's information and knowledge. Baccara (2007) stressed that close relationships with external contractors and service providers could result in unintentional information leakage. Hence, unless deep trust and strong social ties are established between firms, those companies with unique competence should limit their involvement in any outsourcing activities to prevent losing valuable knowledge and information to external parties (Hoecht and Trott 2006 a ; Hoecht and Trott 2006 b ).…”

Determinants of internal and external R&D offshoring: evidence from Spanish firms

“…In the case of R&D offshoring, this fact may influence the selection of the governance model (internal or external) in contexts of technology leakage. External R&D offshoring implies higher risks in situations of imperfect contracts, hold-up problems, and cultural differences (e.g., Baccara, 2007, Lai et al, 2009, Ornelas and Turner, 2008, making firms more sensitive to a lack of information. Companies in groups can be prone to offshoring through the group, avoiding exposure to subcontractors, especially in countries with poor intellectual property rights (García-Vega and Huergo, 2011).…”

Determinants of Internal versus External R&D Offshoring: Evidence from Spanish Firms

“…A first explanation is related to technology leakage. External R&D offshoring implies higher risks in situations of imperfect contracts, hold-up problems, and cultural differences (e.g., Baccara, 2007, Lai et al, 2009, Ornelas and Turner, 2008, making firms more sensitive to a lack of information.In this context, companies can be prone to offshoring through the group, avoiding exposure to subcontractors, especially in countries with poor intellectual property rights (García-Vega and Huergo, 2011). On the basis of this argument, the following hypothesis is put forward:…”