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Outsourcing and Technological Innovations: A Firm-Level Analysis

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  • Bartel, Ann P
  • Lach, Saul
  • Sicherman, Nachum

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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Bibliographic Info

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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Keywords: outsourcing; technological change;

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  1. Adelheid Holl, 2007. "Production Subcontracting and Location," Working Papers 2007-17, FEDEA.
  2. David H. Autor, 2000. "Outsourcing at Will: Unjust Dismissal Doctrine and the Growth of Temporary Help Employment," NBER Working Papers 7557, National Bureau of Economic Research, Inc.
  3. Görg, Holger & Hanley, Aoife, 2009. "Services Outsourcing and Innovation: An Empirical Investigation," IZA Discussion Papers 4404, Institute for the Study of Labor (IZA).
  4. Laura Abramovsky & Rachel Griffith, 2005. "Outsourcing and offshoring of business services: how important is ICT?," IFS Working Papers W05/22, Institute for Fiscal Studies.
  5. Pol Antras & Elhanan Helpman, 2004. "Global Sourcing," Journal of Political Economy, University of Chicago Press, vol. 112(3), pages 552-580, June.
  6. 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.
  7. 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.
  8. Oliver Hart & Sanford Grossman, 1985. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Working papers 372, Massachusetts Institute of Technology (MIT), Department of Economics.
  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.
  10. Carmen Díaz Mora, . "DETERMINANTS OF OUTSOURCING PRODUCTION: A Dynamic Panel Data Approach for Manufacturing Industries," Working Papers on International Economics and Finance 05-07, FEDEA.
  11. 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.
  12. 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.
  13. Elisabetta Magnani, 2006. "Technological diffusion, the diffusion of skill and the growth of outsourcing in US manufacturing," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 15(7), pages 617-647.
  14. 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.
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Cited by:
  1. Dharma Kwon, H. & Lippman, Steven A. & Tang, Christopher S., 2011. "Sourcing decisions of project tasks with exponential completion times: Impact on operating profits," International Journal of Production Economics, Elsevier, vol. 134(1), pages 138-150, November.

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