The effect of coordination requirements on sourcing decisions: Evidence from patent prosecution services

Research Summary: Although the link between coordination requirements and vertical integration is theoretically well established, empirical tests of this relationship are hard to implement due to the simultaneous determination of both variables. In this study, we take advantage of regulatory changes in patent prosecution in the United States to provide plausibly causal evidence linking increases in coordination requirements with insourcing. Moreover, we examine the role of plural sourcing, that is, simultaneously making and buying, when responding to changes in coordination requirements. We find that the move toward insourcing is more pronounced for plural-sourcing firms as compared to firms relying on outsourcing. These results are consistent with the view that plural sourcing provides firms with flexibility to switch between sourcing modes when facing changing coordination requirements. Managerial Summary: We study the sourcing of patent prosecution services in large innovative companies and show that in-house production is more beneficial when coordination requirements between inventors and attorneys increase. Importantly, we find that plural-sourcing firms, that is, firms that work with both internal attorneys and external law firms, are more likely to respond to these increases and move toward insourcing as compared to firms relying only on outsourcing. This suggests that plural sourcing can be regarded as a strategic investment in sourcing flexibility, allowing firms to respond to changing coordination requirements. This is an adaptive capability which is especially useful in knowledge-intensive sectors.