Firm Size Evolution and Outsourcing
41 Pages Posted: 16 Apr 2013 Last revised: 29 Apr 2013
Date Written: March 23, 2013
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.
Keywords: Small Business, Outsourcing, Management Organization, Size Distribution
JEL Classification: C38, D2, L24, L6
Suggested Citation: Suggested Citation