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To Outsource or Not to Outsource in an Integrated World

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  • Choi, E. Kwan

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.

Suggested Citation

  • Choi, E. Kwan, 2007. "To Outsource or Not to Outsource in an Integrated World," Staff General Research Papers Archive 12535, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genres:12535
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    References listed on IDEAS

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    1. Long, Ngo Van, 2005. "Outsourcing and technology spillovers," International Review of Economics & Finance, Elsevier, vol. 14(3), pages 297-304.
    2. Gorg, Holger & Hanley, Aoife, 2005. "Labour demand effects of international outsourcing: Evidence from plant-level data," International Review of Economics & Finance, Elsevier, vol. 14(3), pages 365-376.
    3. Chi-Chur Chao & Eden S. H. Yu, 1993. "Content Protection, Urban Unemployment and Welfare," Canadian Journal of Economics, Canadian Economics Association, vol. 26(2), pages 481-492, May.
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    Cited by:

    1. E. Kwan Choi, Jai-Young Choi, 2010. "To Outsource or Not To Outsource in North-South Trade," Frontiers in Finance and Economics, SKEMA Business School, vol. 7(1), pages 60-81, April.
    2. Stijepic, Denis & Wagner, Helmut, 2008. "Impacts of Intermediate Trade on Structural Change," MPRA Paper 40841, University Library of Munich, Germany, revised 23 Aug 2012.
    3. Gianpaolo Rossini, 2007. "Pitfalls in Private and Social Incentives of Vertical Cross‐border Integration and Disintegration," Review of International Economics, Wiley Blackwell, vol. 15(5), pages 932-947, November.
    4. Choi, E. Kwan & Choi, Jai-Young, 2013. "Financial advantage, outsourcing and FDI under wage uncertainty," The North American Journal of Economics and Finance, Elsevier, vol. 24(C), pages 260-267.
    5. Chen, Kebing & Xiao, Tiaojun, 2015. "Outsourcing strategy and production disruption of supply chain with demand and capacity allocation uncertainties," International Journal of Production Economics, Elsevier, vol. 170(PA), pages 243-257.

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