Firm Size Evolution and Outsourcing

41 Pages Posted: 16 Apr 2013 Last revised: 29 Apr 2013

See all articles by Sasan Bakhtiari

Sasan Bakhtiari

Australian Department of Industry; Crawford School, ANU

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

Bakhtiari, Sasan, Firm Size Evolution and Outsourcing (March 23, 2013). UNSW Australian School of Business Research Paper No. 2013-07. Available at SSRN: or

Sasan Bakhtiari (Contact Author)

Australian Department of Industry ( email )

341 George Street
Sydney, NSW 2000


Crawford School, ANU ( email )

7 Liversidge Street
Lennox Crossing
Canberra, ACT 0200


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