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How Local are IT Outsourcing Markets: Proximity and Software Programming

50 Pages Posted: 22 Dec 2006  

Ashish Arora

Duke University - Fuqua School of Business; National Bureau of Economics Research; Duke Innovation & Entrepreneurship Initiative

Chris Forman

Cornell University - Dyson School of Applied Economics and Management; Georgia Institute of Technology - Scheller College of Business

Date Written: December 2006

Abstract

We examine the question of which services are tradable within a concrete setting: the outsourcing of IT services across a broad cross-section of establishments in the US. If markets for IT services are local, then we should expect increases in local supply should increase the likelihood of outsourcing by lowering the cost of outsourcing. If markets are not local then local supply will not affect outsourcing demand. We analyze the outsourcing decisions of a large sample of 99,775 establishments in 2002 and 2004, for two types of IT services: programming and design and hosting. Programming and design projects require communication of detailed user requirements whereas hosting requires less coordination between client and service provider than programming and design. Our empirical results bear out this intuition: The probability of outsourcing programming and design is increasing in the local supply of outsourcing, and this sensitivity to local supply conditions has been increasing over time. This suggests there is some non-tradable or "local" component to programming and design services that cannot be easily removed. In contrast, the decision to outsource hosting is sensitive to local supply only for a minority of firms for which network uptime and security concerns are particularly acute.

Keywords: Outsourcing, Tradable Services, IT Investment, Local Supply

JEL Classification: L22, L86, L10

Suggested Citation

Arora, Ashish and Forman, Chris, How Local are IT Outsourcing Markets: Proximity and Software Programming (December 2006). Available at SSRN: https://ssrn.com/abstract=953254 or http://dx.doi.org/10.2139/ssrn.953254

Ashish Arora

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States

National Bureau of Economics Research

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Duke Innovation & Entrepreneurship Initiative ( email )

215 Morris St., Suite 300
Durham, NC 27701
United States

Chris Forman (Contact Author)

Cornell University - Dyson School of Applied Economics and Management ( email )

Ithaca, NY
United States

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

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