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Size Evolution and Outsourcing: Theory and Evidence from Australian Manufacturing

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  • Sasan Bakhtiari

    ()
    (School of Economics, The University of New South Wales)

Abstract

This paper sheds new light on the forces shaping outsourcing decision by considering a certain form of non-linearity in overhead costs which effectively discretizes a firm’s size into small and large regimes. Extending Grossman & Helpman (2002) in this line shows that firms unable to fully transition from small to large due to their level of efficiency would outsource to downsize and save on overhead costs. A panel of Australian manufacturing firms is used to construct an instrument for the transitioning firm and to test the hypothesis. In support of the theory, those firms in transition with no growth plans have stronger incentives to contract out and downsize. The findings open a new avenue to rethink growth and job creation amongst small businesses.

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File URL: http://research.economics.unsw.edu.au/RePEc/papers/2012-08.pdf
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Bibliographic Info

Paper provided by School of Economics, The University of New South Wales in its series Discussion Papers with number 2012-08.

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Length: 37 pages
Date of creation: Oct 2011
Date of revision:
Handle: RePEc:swe:wpaper:2012-08

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Related research

Keywords: Small Business; productivity; outsourcing; Overhead Cost.;

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References

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  1. Sasan Bakhtiari, 2011. "Efficiency and Outsourcing: Evidence from Australian Manufacturing," Discussion Papers 2012-07, School of Economics, The University of New South Wales.
  2. 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.
  3. Stefano Federico, 2010. "Outsourcing versus integration at home or abroad and firm heterogeneity," Empirica, Springer, vol. 37(1), pages 47-63, February.
  4. Robert Breunig & Marn-Heong Wong, 2007. "A Richer Understanding of Australia’s Productivity Performance in the 1990s: Improved estimates based upon firm-level panel data," CEPR Discussion Papers 545, Centre for Economic Policy Research, Research School of Economics, Australian National University.
  5. John Haltiwanger & Ron S. Jarmin & Javier Miranda, 2010. "Who Creates Jobs? Small vs. Large vs. Young," Working Papers 10-17, Center for Economic Studies, U.S. Census Bureau.
  6. Catherine J. Morrison Paul & Mahmut Yasar, 2009. "Outsourcing, productivity, and input composition at the plant level," Canadian Journal of Economics, Canadian Economics Association, vol. 42(2), pages 422-439, May.
  7. Kevin J. Fox & W. Erwin Diewert, 2004. "On the Estimation of Returns to Scale, Technical Progress and Monopolistic Markups," Econometric Society 2004 Australasian Meetings 310, Econometric Society.
  8. José C. Fariñas & Ana Martín-Marcos, 2010. "Foreign Sourcing and Productivity: Evidence at the Firm Level," The World Economy, Wiley Blackwell, vol. 33(3), pages 482-506, 03.
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Citations

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Cited by:
  1. Fabio Pieri & Enrico Zaninotto, 2010. "Vertical Integration and Efficiency: an application to the Italian Machine Tool Industry," DISA Working Papers 1006, Department of Computer and Management Sciences, University of Trento, Italy, revised 24 Nov 2010.
  2. Sasan Bakhtiari, 2012. "Small Business Redefined: A Quasi-Linear Fuzzy Classification of Firm Size," Discussion Papers 2012-24, School of Economics, The University of New South Wales.

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