Outsourcing motives, competitiveness and taxation

Jan König

No 2010/33, Discussion Papers from Free University Berlin, School of Business & Economics

Abstract: This paper shows the strategic aspects of international outsourcing in an oligopolistic market, if outsourcing is attractive because of fixed cost savings. We show that outsourcing decisions are strategic substitutes. Furthermore, we demonstrate that due to decreasing individual output, intensified competition increases the incentive to save fixed costs of integrated production and thus leads to more outsourcing. Additionally, we analyse how domestic costs and taxation affect the equilibrium level of outsourcing and employment. Here, we find that lower domestic costs decrease the proportion of outsourcing and therefore, increase employment. Concerning the impact of taxation, we find that a lower consumption tax on output decreases outsourcing. In case of a reversed outsourcing motivation, where outsourcing is associated with lower marginal costs but higher fixed costs than the domestic production, we show that the opposite effects concerning competition and taxation occur.

Keywords: outsourcing; cost structure; Cournot-competition; taxation (search for similar items in EconPapers)
JEL-codes: D20 L13 L22 L23 L24 (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-bec and nep-cse
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