Title: Endogenous technology sharing in decentralized production
Authors: Marijn Verschelde - IESEG School of Management (France) [presenting]
Stefano Nasini - IESEG School of Management (France)
Bruno Merlevede - Ghent University (Belgium)
Abstract: The joint nature of knowledge-based assets drives firms to pursue multi-plant production. By facilitating knowledge sharing across plants, integrated firms have higher returns on investment for intangibles in comparison to single-plant firms. We study the endogenous choice of intangible assets by the parent firm, organizing decentralized multi-plant production. A distinguishing feature of our framework is that we allow for anticipation by the parent of the affiliates' best response to the technology transfer and transfer price, set by the parent. Our approach is general in the sense that we cover both horizontal and vertical production and allow for dynamic optimization by the follower. We implement the leader-follower structure by the use of a bi-level optimization framework wherein the parent acts as a newsvendor. For horizontally organized firm structures, we recover the optimal solution, and for vertically organized firm structures, we recover tight lower and upper bounds. We show the empirical applicability by the use of a customized version of the Orbis dataset that focuses on European firms with complete parent-affiliate balance sheet information at the firm-year level. Our advocated approach nicely recovers stylized facts and pinpoints profit gains that originate from anticipating the best response of the follower.