Outsourcing business service and the scope of local markets

Yukako Ono ()

No WP-01-09, Working Paper Series from Federal Reserve Bank of Chicago

Abstract: This paper examines outsourcing to test whether productivity-enhancing specialization is facilitated in bigger cities. First, the paper provides a theoretical model which shows that greater local demand for a given input promotes the entry of suppliers into a city; the increased number of suppliers then results in lower outsourcing prices and a higher use of outsourcing by final producers, therefore reducing the final producers' production costs. I then test the predictions of the model by examining manufacturing plants' practices of outsourcing business services, by using plant-level data from the 1992 Annual Survey of Manufactures. The empirical results show that an exogenous increase in local demand promotes the entry of service suppliers and increases a firm's probability of outsourcing for white-collar services. In particular, I found that doubling the intensity of the use of a service in a U.S. county, which can be attributed to the industrial composition of the county, results in a 7% to 25% increase in the probability of outsourcing.

Keywords: Contracts; Industrial productivity (search for similar items in EconPapers)
Date: 2001
New Economics Papers: this item is included in nep-ent and nep-pke
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Citations: View citations in EconPapers (11)

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Working Paper: Outsourcing Business Service and the Scope of Local Markets (2001)
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