Size Evolution and Outsourcing: Theory and Evidence from Australian Manufacturing

37 Pages Posted: 17 Jan 2012

See all articles by Sasan Bakhtiari

Sasan Bakhtiari

Australian Department of Industry; Crawford School, ANU

Date Written: December 1, 2011

Abstract

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.

Keywords: small business, productivity, outsourcing, overhead cost

JEL Classification: C38, D23, L24, L6

Suggested Citation

Bakhtiari, Sasan, Size Evolution and Outsourcing: Theory and Evidence from Australian Manufacturing (December 1, 2011). UNSW Australian School of Business Research Paper No. 2012ECON08. Available at SSRN: https://ssrn.com/abstract=1984398 or http://dx.doi.org/10.2139/ssrn.1984398

Sasan Bakhtiari (Contact Author)

Australian Department of Industry ( email )

341 George Street
Sydney, NSW 2000
Australia

HOME PAGE: http://sites.google.com/site/sasanbakhtiari

Crawford School, ANU ( email )

7 Liversidge Street
Lennox Crossing
Canberra, ACT 0200
Australia

HOME PAGE: http://sites.google.com/site/sasanbakhtiari

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