De Economist

, Volume 149, Issue 1, pp 33–51 | Cite as

Macroeconomic Consequences of Outsourcing: An Analysis of Growth, Welfare, and Product Variety

  • Henri L.F. De Groot


Outsourcing of non-core activities is nowadays a common business strategy. Declining transaction and transportation costs caused by the advent of Information and Communication Technology are a potentially important driving force behind this development. This paper provides a theoretical framework for analysing a firm's incentive to follow such a strategy of outsourcing and its consequences for macroeconomic variables like growth and product variety. We divide production activities into core and non-core activities. Non-core activities can be performed within the firm or can be mediated by the market. We derive conditions under which outsourcing occurs, and under which outsourcing is socially desirable. These conditions do not necessarily coincide. Outsourcing may hence be a profitable strategy for firms, while it is socially suboptimal. Crucial parameters in the model are the relative scale of core versus non-core activities, management costs, transaction costs and love for variety of consumers.


Communication Technology Transaction Cost International Economic Public Finance Production Activity 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


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© Kluwer Academic Publishers 2001

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  • Henri L.F. De Groot

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