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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.

Suggested Citation

  • Sasan Bakhtiari, 2011. "Size Evolution and Outsourcing: Theory and Evidence from Australian Manufacturing," Discussion Papers 2012-08, School of Economics, The University of New South Wales.
    • Handle: RePEc:swe:wpaper:2012-08
    as

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    File URL: http://research.economics.unsw.edu.au/RePEc/papers/2012-08.pdf
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    References listed on IDEAS

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    Cited by:

    1. Fabio Pieri & Enrico Zaninotto, 2013. "Vertical integration and efficiency: an application to the Italian machine tool industry," Small Business Economics, Springer, vol. 40(2), pages 397-416, February.
    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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    More about this item

    Keywords

    Small Business; productivity; outsourcing; Overhead Cost.;
    All these keywords.

    JEL classification:

    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures
    • L6 - Industrial Organization - - Industry Studies: Manufacturing

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