Grossman–Hart–Moore Goes to Italy: Rethinking the Boundaries of the Firm

This paper provides new empirical evidence on the boundaries of the firm, as shaped by the ownership (make-or-buy) and location (domestic-or-foreign) decisions of sourcing. In particular, we draw on the Grossman–Hart–Moore framework to investigate the role of input characteristics, investment spillovers and firm productivity in ownership and location decisions. For the purpose of the empirical analysis, we rely on original survey data of a stratified sample of Italian manufacturing firms, headquartered in Lombardy. Our probit, multinomial probit and conditional mixed process estimations suggest a number of robust regularities. Some of them confirm so far unexplored theoretical predictions from the Grossman–Hart–Moore framework; others provide new insights on specific relationships on which the theory is silent. As for ownership, we find that reliance on specific inputs and intangible inputs fosters integration over non-integration; moreover, firms acknowledging cross spillover effects are more likely to opt for joint-venture than non-integration. As for location, domestic sourcing prevails over foreign sourcing in presence of investment spillovers, whereas input characteristics play no role. Lastly, productivity is a major driver of the boundaries of the firm in that productive firms are more likely to source abroad than domestically. Holding across different econometric models and a number of robustness checks, our results contribute to the property rights theory of the firm and its recent developments.