When Do Multinational Firms Outsource? Evidence from the Hotel Industry

Multinational firms face two questions in deciding whether or not to outsource a stage of production. First, where should production be located? Second, who should own or control the productive assets? In this paper, we test two theories of these outsourcing decisions and we focus on the predictions for the ownership/control decision. We adapt the Antras and Helpman (2004) property rights and Grossman and Helpman (2004) managerial incentives models of the multinational firm to a setting in which a hotel headquarters chooses the size and organizational form of each of its hotel properties. The property rights mechanism predicts a monotonic relationship between the size of a hotel and the probability that it is owned by the headquarters. The managerial incentives mechanism predicts an inverted-U relationship between size and the likelihood that the headquarters controls the hotel; small and large hotels are likely to be managed by a third party, while medium-sized hotels are likely to be managed by the headquarters. We test these propositions using new data on the organizational form, location, and size of more than 4000 hotel properties that operate under 15 different brands in 103 countries. Four hotel brands exhibit patterns that are consistent with either mechanism. For three other brands, organizational structures are consistent with the predictions of the managerial incentives mechanism and inconsistent with the predictions of a model based solely on property rights concerns. These results suggest that agency problems are an important influence on the organizational choices of multinational firms. However, the relative importance of agency and holdup problems may vary substantially across brands.