Growing by Outsourcing: A Tale of Two Growths
32 Pages Posted: 12 May 2021 Last revised: 13 May 2022
Date Written: May 13, 2022
Abstract
This paper empirically explores the nexus between the intensity of outsourcing by an entrepreneur and its ability to scale up in size. Intensity is measured as a continuous index to proxy for the share of jobs being contracted out. Using a non-parametric Cox proportional hazard model, the paper estimates the odds that a firm grows into a medium or large firm as a function of outsourcing intensity. Two strategies stand out. In one case, the firm contracts about 10 per cent of its workforce and doubles its chance of scaling up. In the second case, the firm contracts more than 90 per cent of its workforce and the odds go up by 2.5 times. A priori, firms in both groups are indistinct in many ways, except that firms choosing to grow with minimal outsourcing show early signs of growth. The latter firms grow to larger sizes, create more jobs, pay higher wages, and are more likely to export and conduct research. Firms growing by extreme outsourcing are only apter at surviving. A theory of management capability seems to be part of the explanation for the observed behavior.
Keywords: Entrepreneurship, Outsourcing, Employment, Wages, Business Dynamics
JEL Classification: J31, L24, L25, L26
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