Outsourcing and Technological Innovations: A Firm-Level Analysis

Ann P Bartel, Saul Lach and Nachum Sicherman

No 6731, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper presents a dynamic model that analyzes how firms’ expectations with regards to technological change influence the demand for outsourcing. We show that outsourcing becomes more beneficial to the firm when technology is changing rapidly. As the pace of innovations in production technology increases, the firm has less time to amortize the sunk costs associated with purchasing the new technologies. This makes producing in-house with the latest technologies relatively more expensive than outsourcing. The model therefore provides an explanation for the recent increases in outsourcing that have taken place in an environment of increased expectations for technological change. We test the predictions of the model using a panel dataset on Spanish firms for the period 1990 through 2002. The empirical results support the main prediction of the model, namely, that all other things equal, the demand for outsourcing increases with the probability of technological change.

Keywords: outsourcing; technological change (search for similar items in EconPapers)
JEL-codes: J21 L11 L24 O33 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-cse and nep-ino
Date: Written 2008-03

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Working Paper: Outsourcing and Technological Innovations: A Firm-Level Analysis (2008)
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