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Firm Size Evolution and Outsourcing

  • Sasan Bakhtiari

    ()

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

This paper sheds new light on forces shaping the outsourcing decision by linking the decision to a certain form of non-linearity in overhead costs which divides a firm’s operation into small and large regimes. Marginal firms that find evolution into a large business too costly outsource in a bid to grow out of bounds instead of expanding internally. This process leads to a lumpy relationship between size and outsourcing, in which outsourcing is only practiced by narrow set of firms in the middle of the distribution. The theoretical implication for size distribution is a bunching of firms at the size where the transition to large regime takes place with a missing middle immediately following it. A panel of Australian small and medium-size firms is used to put the predictions to test with mostly supportive results. 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/2013-07.pdf
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Paper provided by School of Economics, The University of New South Wales in its series Discussion Papers with number 2013-07.

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Length: 41 pages
Date of creation: Jul 2013
Date of revision:
Handle: RePEc:swe:wpaper:2013-07
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  1. Robert Breunig & Marn-Heong Wong, 2008. "A Richer Understanding of Australia's Productivity Performance in the 1990s: Improved Estimates Based Upon Firm-Level Panel Data," The Economic Record, The Economic Society of Australia, vol. 84(265), pages 157-176, 06.
  2. Arindrajit Dube & Ethan Kaplan, 2010. "Does Outsourcing Reduce Wages in the Low-Wage Service Occupations? Evidence from Janitors and Guards," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 63(2), pages 287-306, January.
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  4. Dharmapala, Dhammika & Slemrod, Joel & Wilson, John Douglas, 2011. "Tax policy and the missing middle: Optimal tax remittance with firm-level administrative costs," Journal of Public Economics, Elsevier, vol. 95(9), pages 1036-1047.
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  8. Stefano Federico, 2010. "Outsourcing versus integration at home or abroad and firm heterogeneity," Empirica, Springer, vol. 37(1), pages 47-63, February.
  9. Evans, David S, 1987. "The Relationship between Firm Growth, Size, and Age: Estimates for 100 Manufacturing Industries," Journal of Industrial Economics, Wiley Blackwell, vol. 35(4), pages 567-81, June.
  10. 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.
  11. 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.
  12. Acs, Zoltan J & Audretsch, David B, 1988. "Innovation in Large and Small Firms: An Empirical Analysis," American Economic Review, American Economic Association, vol. 78(4), pages 678-90, September.
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  15. Stacy Sneeringer & Nigel Key, 2011. "Effects of Size-Based Environmental Regulations: Evidence of Regulatory Avoidance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 93(4), pages 1189-1211.
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