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Profit reducing international outsourcing

Author

Listed:
  • Sugata Marjit
  • Arijit Mukherjee

Abstract

Recent empirical evidence shows a negative relationship between international outsourcing and profitability. This paper provides a theoretical explanation for this phenomenon. We show that, in an oligopolistic market, firms earn lower profits in the outsourcing equilibrium compared to the situation where neither firm does outsourcing, and this holds irrespective of the intensity of competition. We show that whether international outsourcing is likely to reduce profit under more intense competition (measured by the degree of product differentiation, number of firms and the type of product market competition, namely, Cournot and Bertrand competition) is ambiguous. We further show that international outsourcing may be socially 'excessive' for the sourced country and for the world.

Suggested Citation

  • Sugata Marjit & Arijit Mukherjee, 2008. "Profit reducing international outsourcing," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 17(1), pages 21-35.
    • Handle: RePEc:taf:jitecd:v:17:y:2008:i:1:p:21-35
    DOI: 10.1080/09638190701727786
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    Cited by:

    1. Holger Görg & Aoife Hanley, 2011. "Services Outsourcing And Innovation: An Empirical Investigation," Economic Inquiry, Western Economic Association International, vol. 49(2), pages 321-333, April.
    2. Mar𨀠 Ángeles Cadarso Vecina & Nuria Gómez Sanz & Luis Antonio López Santiago & Mar𨀠 Ángeles Tobarra Gómez, 2012. "Offshoring components and their effect on employment: firms deciding about how and where," Applied Economics, Taylor & Francis Journals, vol. 44(8), pages 1009-1020, March.
    3. Arijit Mukherjee & Yingyi Tsai, 2010. "International Outsourcing And Welfare Reduction: An Entry‐Deterrence Story," Manchester School, University of Manchester, vol. 78(6), pages 647-659, December.
    4. Holger Görg & Aoife Hanley, 2007. "International Services Outsourcing and Innovation: An Empirical Investigation," Discussion Papers 07/43, University of Nottingham, GEP.

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