CEPII, Recherche et Expertise sur l'economie mondiale
Fragmenting global business processes: A protection for proprietary information

Julien Gooris
Carine Peeters

 Highlights :
  • We study the substitution effect between three types of protection for firms’ proprietary content in service operations within international value chains: legal protection, internalization and the fine-slicing of foreign activities.
  • We show that firms respond to the lack of legal protection and internal controls by fragmenting the operations entrusted to foreign production units.
  • We find that firms increasingly rely on the protection mechanism of fragmentation as they accumulate host-country experience and as they source activities of higher content value.

 Abstract :
With the progress of information and communication technologies, the cost and efforts to remotely exchange information have drastically fallen. It has created new opportunities to leverage comparative advantages by reorganizing value chains along the geographic dimension and by reconsidering the organizational boundaries of the firm (i.e. the governance model of operations). However the global disaggregation of the firm’s processes tends to increase the dispersion of firm’s proprietary information and knowledge across locations and intermediate producers. Firms are potentially exposed to higher levels of misappropriation hazard and forced to elaborate protection strategies to mitigate that risk. This study shows that firms adjust the fragmentation of activities entrusted to foreign services production units to adapt their information and knowledge protection strategy to the availability of strong legal protection (from the local institutions) or internal control mechanisms. We hypothesize and empirically support that, when the above mechanisms are not available, firms use the substitute protection mechanism of fragmenting global business processes across multiple services production units. Through their capabilities to integrate the multiple fragments that compose production processes, firms can exploit the complementarities between these fragments while reducing the misappropriation hazard of individual fragments. We find also that the propensity to turn to this alternative protection mechanism increases with firm’s host country specific experience and with the alternative value of the proprietary information.

 Keywords : Fragmentation | Misappropriation | Services | Information | Institutional environment | Outsourcing

 JEL : F23, O34, L8
CEPII Working Paper
N°2014-12, September 2014

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 Fields of expertise

Trade & Globalization