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Outsourcing and Technological Innovations: A Firm-Level Analysis

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Author Info
Bartel, Ann P
Lach, Saul
Sicherman, Nachum

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Abstract

This paper presents a dynamic model that analyzes how firms’ expectations with regards to technological change influence the demand for outsourcing. We show that outsourcing becomes more beneficial to the firm when technology is changing rapidly. As the pace of innovations in production technology increases, the firm has less time to amortize the sunk costs associated with purchasing the new technologies. This makes producing in-house with the latest technologies relatively more expensive than outsourcing. The model therefore provides an explanation for the recent increases in outsourcing that have taken place in an environment of increased expectations for technological change. We test the predictions of the model using a panel dataset on Spanish firms for the period 1990 through 2002. The empirical results support the main prediction of the model, namely, that all other things equal, the demand for outsourcing increases with the probability of technological change.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6731.

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Date of creation: Mar 2008
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Handle: RePEc:cpr:ceprdp:6731

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Related research
Keywords: outsourcing; technological change;

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Find related papers by JEL classification:
J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures
O33 - Economic Development, Technological Change, and Growth - - Technological Change - - - Technological Change: Choices and Consequences; Diffusion Processes

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References listed on IDEAS
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  1. Adelheid Holl, 2007. "Production Subcontracting and Location," Working Papers 2007-17, FEDEA. [Downloadable!]
    Other versions:
  2. Holger Görg & Aoife Hanley & Eric Strobl, 2008. "Productivity effects of international outsourcing: evidence from plant-level data," Canadian Journal of Economics, Canadian Economics Association, vol. 41(2), pages 670-688, May. [Downloadable!] (restricted)
    Other versions:
  3. Mary Amiti & Shang-Jin Wei, 2006. "Service Offshoring and Productivity: Evidence from the United States," NBER Working Papers 11926, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Abraham, Katharine G & Taylor, Susan K, 1996. "Firms' Use of Outside Contractors: Theory and Evidence," Journal of Labor Economics, University of Chicago Press, vol. 14(3), pages 394-424, July. [Downloadable!] (restricted)
    Other versions:
  5. Laura Abramovsky & Rachel Griffith, 2006. "Outsourcing and Offshoring of Business Services: How Important is ICT?," Journal of the European Economic Association, MIT Press, vol. 4(2-3), pages 594-601, 04-05. [Downloadable!] (restricted)
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  6. Holger Görg & Aoife Hanley, 2008. "Services Outsourcing and Innovation: An empirical investigation," Kiel Working Papers 1417, Kiel Institute for the World Economy. [Downloadable!]
  7. Antràs, Pol & Helpman, Elhanan, 2004. "Global Sourcing," CEPR Discussion Papers 4170, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  8. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August. [Downloadable!] (restricted)
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  9. George P. Baker & Thomas N. Hubbard, 2003. "Make Versus Buy in Trucking: Asset Ownership, Job Design, and Information," American Economic Review, American Economic Association, vol. 93(3), pages 551-572, June. [Downloadable!]
  10. Elisabetta Magnani, 2006. "Technological diffusion, the diffusion of skill and the growth of outsourcing in US manufacturing," Economics of Innovation and New Technology, Taylor and Francis Journals, vol. 15(7), pages 617-647, October. [Downloadable!] (restricted)
  11. Gene M. Grossman & Elhanan Helpman, 2002. "Integration Versus Outsourcing In Industry Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 117(1), pages 85-120, February. [Downloadable!] (restricted)
  12. Robert C. Feenstra & Gordon H. Hanson, 1999. "The Impact Of Outsourcing And High-Technology Capital On Wages: Estimates For The United States, 1979-1990," The Quarterly Journal of Economics, MIT Press, vol. 114(3), pages 907-940, August. [Downloadable!] (restricted)
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