Macroeconomic Consequences of Outsourcing

CentER DP 9843

36 Pages Posted: 19 Sep 1998

See all articles by Henri L. F. de Groot

Henri L. F. de Groot

VU University Amsterdam - Department of Spatial Economics; Tinbergen Institute

Date Written: April 1998

Abstract

Outsourcing of non-core activities by firms is nowadays a common business strategy. This paper provides a theoretical framework for analyzing a firms' incentive to follow such a strategy and its consequences for macroeconomic variables like growth and product variety. We divide production activities into core and non-core activities. Non-core activities can be performed within the firm or can be mediated by the market. We will derive conditions under which outsourcing will occur and under which outsourcing will be socially desirable. These conditions do not necessarily coincide due to two externalities. Outsourcing may hence be a profitable strategy for firms, while it is socially suboptimal. Crucial parameters in the model are the relative scale of core versus non-core activities, traditional management costs, transaction costs and taste for variety of consumers. This paper suggests that declining transaction costs are a crucial factor in explaining the observed increase in outsourcing.

JEL Classification: D23, L16, O40

Suggested Citation

de Groot, Henri L.F., Macroeconomic Consequences of Outsourcing (April 1998). CentER DP 9843. Available at SSRN: https://ssrn.com/abstract=90255 or http://dx.doi.org/10.2139/ssrn.90255

Henri L.F. De Groot (Contact Author)

VU University Amsterdam - Department of Spatial Economics ( email )

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands
+31 20 598 6168 (Phone)
+31 20 598 6004 (Fax)

Tinbergen Institute

Gustav Mahlerplein 17
Amsterdam, 1082 MS
Netherlands

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