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Size Evolution and Outsourcing: Theory and Evidence from Australian Manufacturing

  • Sasan Bakhtiari

    ()

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

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    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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    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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    Web page: http://www.economics.unsw.edu.au/
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    1. Diewert, W. Erwin & Fox, Kevin J., 2008. "On the estimation of returns to scale, technical progress and monopolistic markups," Journal of Econometrics, Elsevier, vol. 145(1-2), pages 174-193, July.
    2. Katharine G. Abraham & Susan K. Taylor, 1993. "Firms' Use of Outside Contractors: Theory and Evidence," NBER Working Papers 4468, National Bureau of Economic Research, Inc.
    3. Gene M. Grossman & Elhanan Helpman, 2002. "Integration versus Outsourcing in Industry Equilibrium," The Quarterly Journal of Economics, Oxford University Press, vol. 117(1), pages 85-120.
    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. Sasan Bakhtiari, 2011. "Efficiency and Outsourcing: Evidence from Australian Manufacturing," Discussion Papers 2012-07, School of Economics, The University of New South Wales.
    6. John C. Haltiwanger & Ron S. Jarmin & Javier Miranda, 2010. "Who Creates Jobs? Small vs. Large vs. Young," NBER Working Papers 16300, National Bureau of Economic Research, Inc.
    7. Stefano Federico, 2010. "Outsourcing versus integration at home or abroad and firm heterogeneity," Empirica, Springer, vol. 37(1), pages 47-63, February.
    8. Michael Olive, 2004. "Markup, Returns To Scale, The Business Cycle And Openness: Evidence From Australian Manufacturing," Economic Papers, The Economic Society of Australia, vol. 23(1), pages 44-57, 03.
    9. 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.
    10. 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.
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