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Outsourcing Business Service and the Scope of Local Markets

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  • Yukako Ono

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.

Suggested Citation

  • Yukako Ono, 2000. "Outsourcing Business Service and the Scope of Local Markets," Working Papers 00-14, Center for Economic Studies, U.S. Census Bureau.
    • Handle: RePEc:cen:wpaper:00-14
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    File URL: https://www2.census.gov/ces/wp/2000/CES-WP-00-14.pdf
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    References listed on IDEAS

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    Cited by:

    1. Ann Bartel & Saul Lach & Nachum Sicherman, 2005. "Outsourcing and Technological Change," NBER Working Papers 11158, National Bureau of Economic Research, Inc.
    2. Henderson, J. Vernon, 2003. "Marshall's scale economies," Journal of Urban Economics, Elsevier, vol. 53(1), pages 1-28, January.
    3. Henderson, J. Vernon, 2005. "Urbanization and Growth," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 24, pages 1543-1591, Elsevier.
    4. J. Vernon Henderson, 2003. "Urbanization and Economic Development," Annals of Economics and Finance, Society for AEF, vol. 4(2), pages 275-341, November.

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