Growing by outsourcing: a tale of two growths

This paper empirically explores the nexus between the intensity of outsourcing by an entrepreneur and its ability to scale up in size. Intensity is measured as a continuous index to proxy for the share of jobs being contracted out. Using a non-parametric Cox proportional hazard model, the paper estimates the odds that a firm grows into a medium or large firm as a function of outsourcing intensity. Two strategies stand out. In one case, the firm contracts about 10 per cent of its workforce and doubles its chance of scaling up. In the second case, the firm contracts more than 90 per cent of its workforce and the odds go up by 2.5 times. A priori, firms in both groups are indistinct in many ways, except that firms choosing to grow with minimal outsourcing show early signs of growth. The latter firms grow to larger sizes, create more jobs, pay higher wages, and are more likely to export and conduct research. Firms growing by extreme outsourcing are only apter at surviving. Resource-based view of firms and management capability seem to be part of the explanation for the observed behavior.

Automated summary

This paper empirically examines the relationship between the intensity of outsourcing by an entrepreneur and its ability to scale up in size. The study finds that contracting out around 10% of the workforce doubles the odds of scaling up, while outsourcing more than 90% of the workforce increases the odds by 2.5 times. Firms choosing minimal outsourcing show early signs of growth and tend to grow larger, create more jobs, pay higher wages, and engage in export and research activities. On the other hand, firms growing through extreme outsourcing are better at survival. The resource-based view of firms and management capability seem to explain this observed behavior.