International Sourcing, Product Complexity and Intellectual Property Rights

In this paper, we propose the technological complexity of a product and the level of Intellectual
Property Rights (IPRs) protection to be the co-determinants of the mode through which multinational firms purchase their goods. We study the choice between intra-firm trade and outsourcing
given heterogeneity at the product- (complexity), firm- (productivity) and country- (IPRs) level.
Our findings suggest that the above three dimensions of heterogeneity are crucial for complex
goods, where firms face a trade-off between higher marginal costs in the case of trade with an
affiliate and higher imitation risks in the case of sourcing from an independent supplier. We test
these predictions by combining data from a French firm-level survey on the mode choice for each
transaction with a newly developed complexity measure at the product-level. Our fractional logit
estimations confirm the proposition that although firms are generally reluctant to source highly
complex goods from outside the firm’s boundaries, they do so when a strong IPR regime in the
host country guarantees the protection of their technology.