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Economic Perspectives, 29, No. 1, February 2005
Outsourcing, Firm Size and Product Complexity: Evidence from Credit Unions
Outsourcing involves firms’ choosing to procure goods or services from other firms rather than producing them internally. For example, firms can outsource accounting and other business services to service providers or maintain internal departments to meet these needs. An automobile manufacturer can design and produce parts internally or outsource by relying on suppliers for production, design, manufacturing, or some combination of these activities. The choices that firms make regarding outsourcing have increasingly attracted the attention of the media, policymakers, and researchers. This attention stems in part from the fact that outsourcing has become increasingly global in scope, meaning that firms that outsource are often moving production and jobs across international borders. In addition, a growing number of researchers in recent years have identified outsourcing as a key determinant of firm profitability and, therefore, a key component of business strategy. Competitive pressure continually drives firms toward more efficient production. Because outsourcing helps firms to achieve this goal, understanding the drivers of outsourcing improves our understanding of business strategy.


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