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Why do some firms contract out production?

  • Angela Triguero,
  • Carmen Díaz Mora

The present paper examines which factors determine outsourcing decision using firm-level panel data for Spanish manufacturing industries. Outsourcing is measured as the manufacture of custom-made finished products or parts and components which have been contracted out to third parties. Moreover, we distinguish whether the main contractor provides the materials to the external supplier or not. Following the theoretical framework of Grossman and Helpman (2002), we take into account the persistence of outsourcing decision as well as other firm, industry and market characteristics that influence the likelihood of contracting out. Using a dynamic panel data probit model, our results show that previous subcontracting decision, wages, market changes, R&D activities, product and process innovation, product differentiation, industry-size and exporter status affect positively the current subcontracting decision.

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Paper provided by FEDEA in its series Studies on the Spanish Economy with number 232.

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Handle: RePEc:fda:fdaeee:232
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  1. 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.
  2. Andrew B. Bernard & J. Bradford Jensen, 2001. "Why Some Firms Export," NBER Working Papers 8349, National Bureau of Economic Research, Inc.
  3. Sourafel Girma & Holger Görg, 2003. "Outsourcing, Foreign Ownership and Productivity: Evidence from UK Establishment Level Data," Discussion Papers of DIW Berlin 361, DIW Berlin, German Institute for Economic Research.
  4. Haucap, Justus & Buehler, Stefan, 2003. "Strategic Outsourcing Revisited," Working Paper 15/2003, Helmut Schmidt University, Hamburg.
  5. Pol Antras & Elhanan Helpman, 2003. "Global Sourcing," Harvard Institute of Economic Research Working Papers 2005, Harvard - Institute of Economic Research.
  6. Kimura, Fukunari & Ando, Mitsuyo, 2005. "Two-dimensional fragmentation in East Asia: Conceptual framework and empirics," International Review of Economics & Finance, Elsevier, vol. 14(3), pages 317-348.
  7. Görg, Holger & Hanley, Aoife, 2004. "Does Outsourcing Increase Profitability?," IZA Discussion Papers 1372, Institute for the Study of Labor (IZA).
  8. 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.
  9. Ono, Yukako, 2003. "Outsourcing business services and the role of central administrative offices," Journal of Urban Economics, Elsevier, vol. 53(3), pages 377-395, May.
  10. Tomiura, Eiichi, 2009. "Foreign versus domestic outsourcing: Firm-level evidence on the role of technology," International Review of Economics & Finance, Elsevier, vol. 18(2), pages 219-226, March.
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