Growing by outsourcing: a tale of two growths

Abstract

This paper empirically explores the nexus between the intensity of outsourcing by an entrepreneur and its ability to scale up in size. Intensity is measured as a continuous index to proxy for the share of jobs being contracted out. Using a non-parametric Cox proportional hazard model, the paper estimates the odds that a firm grows into a medium or large firm as a function of outsourcing intensity. Two strategies stand out. In one case, the firm contracts about 10 per cent of its workforce and doubles its chance of scaling up. In the second case, the firm contracts more than 90 per cent of its workforce and the odds go up by 2.5 times. A priori, firms in both groups are indistinct in many ways, except that firms choosing to grow with minimal outsourcing show early signs of growth. The latter firms grow to larger sizes, create more jobs, pay higher wages, and are more likely to export and conduct research. Firms growing by extreme outsourcing are only apter at surviving. Resource-based view of firms and management capability seem to be part of the explanation for the observed behavior.

Appendices

Robsutness tests

In this part, I present extra robustness tests for the qualitative relationship between outsourcing intensity and firm growth to make sure the qualitative features are preserved with changes to the specification. I try two variations to the specification.

First, I set the threshold for switching into medium-size at the fixed level of $2m, instead of using income quartiles, and re-estimate (3).

I also try a conventional linear model where the dependent is change in the log of turnover over the first 5 years since entry. Specifically, the model to estimate is:

$$\begin{aligned} \log (Turnover_{ji5})-\log (Turnover_{ji1}) = \sum _{b=1}^7 a_bB_b(OutInt_{ji4})+\iota _j+c_j+ \epsilon _{jit}, \end{aligned}$$

(7)

in which, $\iota$ and c denote industry and cohort dummies.

The estimated coefficients from each case are listed in Table 7. The implied relationships are illustrated in Fig. 13. Both relations still have a bimodal form, with InGrow and OutGrow groups of firms showing the highest likelihood of growth.

Table 7 Estimated models for robustness test

Fig. 13

Variations of polarized outsourcing relationship using a a fixed turnover threshold for assigning medium-sized firms, and b using a linear model of change in turnover

Disclaimer

The results of these studies are based, in part, on ABR data supplied by the Registrar to the ABS under A New Tax System (Australian Business Number) Act 1999 and tax data supplied by the ATO to the ABS under the Taxation Administration Act 1953. These require that such data is only used for the purpose of carrying out functions of the ABS. No individual information collected under the Census and Statistics Act 1905 is provided back to the Registrar or ATO for administrative or regulatory purposes. Any discussion of data limitations or weaknesses is in the context of using the data for statistical purposes, and is not related to the ability of the data to support the ABR or ATO’s core operational requirements. Legislative requirements to ensure privacy and secrecy of this data have been followed. Only people authorised under the Australian Bureau of Statistics Act 1975 have been allowed to view data about any particular firm in conducting these analyses. In accordance with the Census and Statistics Act 1905, results have been confidentialised to ensure that they are not likely to enable identification of a particular person or organisation. Views expressed in this paper are those of the author and not necessarily those of the Department of Industry, Innovation and Science or the Australian government.