Outsourcing, firm performance and market exit

This thesis deals with outsourcing and its effects on firm performance and exit decisions. Chapter Two examines the determinants of outsourcing and their heterogeneity in the nature of outsourcing and industry using data drawn from all US manufacturing industries. Our results show that purchasing materials (material outsourcing) is used for industries with small or high market share. Contracting to work (subcontracting) and purchasing services (service outsourcing) are used more for high-wage industries, which is evidence of the saving motive of labor cost through outsourcing. Most of the labor cost saving motive is seen in high-technology (chemical, machinery and electronics) and medium-technology industries (petroleum, metal and plastics).; Chapter Three empirically investigates the effect of outsourcing on firms' performance using firm-level data on US manufacturing. The estimation results show that outsourcing intensity has different effects across categories of manufacturing. Greater use of outsourcing contributes significantly to US firms' poor performance except firms in low-technology industry (food, textile, paper and printing). The negative effect of outsourcing in high-technology firms is larger than the same negative effect in other firms. On the other hand, the effect of outsourcing in low-technology firms is positive on their performance but this effect decreases when more outsourcing is involved.; Chapter Four empirically examines the effect of outsourcing on firms' exit decision using the same US manufacturing firm level data. Chapter Four yields the same findings as Chapter Three: outsourcing intensity has a different effect on firms' exit across categories of manufacturing. Outsourcing firms are likely to increase the probability of staying in business but increasing outsourcing level beyond a certain level may more likely to induce firms to exit. This is true from estimation results of all firms except medium-technology firms. On the contrary, the medium-technology outsourcing firms are more likely to exit but this effect is diminishing when outsourcing is increasing.; Overall, outsourcing has a negative effect on firms but the effect varies by the nature of outsourcing and by the type of manufacturing industry.