To Outsource or Not to Outsource in an Integrated World

Eun Choi

Staff General Research Papers Archive from Iowa State University, Department of Economics

Abstract: This paper investigates outsourcing decision under certainty and uncertainty. When the production activity can be fragmented into two or more processes, an integrated firm must be competitive in each of the fragmented processes. There are gains from outsourcing when factor prices differ between countries. When factor prices are not equalized internationally, a firm may outsource the process which uses its scarce source intensively. If the cost of outsourcing is lower in the foreign country, full outsourcing occurs under certainty. However, even if the outside supplier has a cost advantage, uncertainty in outsourcing cost ensures that partial outsourcing is optimal for risk-averse firms.

Date: 2007-01-01
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Citations: View citations in EconPapers (6)

Published in International Review of Economics and Finance 2007, vol. 16, pp. 521-527

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