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Outsourcing and Technological Innovations: A Firm-Level Analysis

Author

Listed:
  • Bartel, Ann P.

    () (Columbia University)

  • Lach, Saul

    () (Hebrew University, Jerusalem)

  • Sicherman, Nachum

    () (Columbia University)

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.

Suggested Citation

  • Bartel, Ann P. & Lach, Saul & Sicherman, Nachum, 2008. "Outsourcing and Technological Innovations: A Firm-Level Analysis," IZA Discussion Papers 3334, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp3334
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    References listed on IDEAS

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    1. Holl, Adelheid, 2008. "Production subcontracting and location," Regional Science and Urban Economics, Elsevier, vol. 38(3), pages 299-309, May.
    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.
    3. 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, Oxford University Press, vol. 114(3), pages 907-940.
    4. Carmen Díaz Mora, "undated". "DETERMINANTS OF OUTSOURCING PRODUCTION: A Dynamic Panel Data Approach for Manufacturing Industries," Working Papers on International Economics and Finance 05-07, FEDEA.
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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.

    More about this item

    Keywords

    technological change; outsourcing;

    JEL classification:

    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure

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