The Impact of Technological Innovation on Outsourcing Decisions

When technology changes rapidly, outsourcing looks more attractive.

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The “make or buy” decision has been a staple of industrial economics as far back as the start of the Industrial Revolution. So when perceived levels of outsourcing began to rise around the world over the past decade or two, researchers began to ask why.

One reason might be the speed of technological innovation during that period. According to Outsourcing and Technological Innovations: A Firm-Level Analysis, a March 2008 working paper: “As the pace of innovations in production technology increases, the firm has less time to amortize the sunk costs associated with purchasing the new technologies. This makes producing in-house with the latest technologies relatively more expensive than outsourcing.” Thus, for example, periods of rapid innovation could result in new or shorter-lived manufacturing robots that only specialist suppliers can justify acquiring.

The paper’s authors — Ann P. Bartel, the A. Barton Hepburn Professor of Economics at Columbia University’s Graduate School of Business, Saul Lach, associate professor in the economics department at The Hebrew University of Jerusalem, and Nachum Sicherman, professor of economics and finance at Columbia’s Graduate School of Business — studied Spanish manufacturers from 1990 through 2002 and concluded that outsourcing does increase with technological change. Using the Encuesta sobre Estrategias Empresariales, an annual survey of Spanish manufacturing companies, for the years 1990, 1994, 1998 and 2002, the researchers examined responses to whether the companies outsourced the manufacture of custom-made finished products or parts and, if so, the value of the outsourced items purchased. The number of respondents ranged from 1,708 in 2002 to 2,189 in 1990.

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