The Determinants of Changes in the Organization of Production: Evidence from Spanish Plant-Level Data

Abstract

In this paper we empirically examine the determinants of changes in the organization of production using detailed information on a data set from a new plant-level survey from 1003 plants distributed in all manufacturing industries in Spain. In particular, and among many other things, survey respondents are asked how practices of outsourcing of services to others had changed in the last three years. The answer to this question is informative of the changes in the importance of backward integration for each of the plants interviewed. Using other information provided in the survey, we relate the reported changes in outsourcing to changes in other relevant dimensions as possible determinants of the boundaries of the firm. These are plant size, downstream market power, cost of inputs, price and quality of the final good and technological progress. Our findings show that outsourcing increases are strongly positively correlated with increases in market quota and increases in market competition. We also find that outsourcing increases when plants face simultaneous increases in product quality and product prices and that outsourcing decreases when plants face simultaneous increases in market quota and market competition. Finally, we find that multi-plant and one-plant firms adjust their outsourcing practices differently to outside changes. Since either TCE or PRT theories of vertical integration fail to fully explain the patterns found in our data, we close this paper by following Adam Smith's claim that the extent of the market seems to be the only factor consistently limiting the degree of specialization in our setting.

Keywords: outsourcing, vertical integration, competition, manufacturing plants

JEL Classification: L23, L22, L60.