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Profit reducing international outsourcing

Lookup NU author(s): Dr Ankur Mukherjee

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Abstract

Recent empirical evidence shows a negative relationship between international outsourcing and profitability. This paper provides a theoretical explanation for this phenomenon. We show that, in an oligopolistic market, firms earn lower profits in the outsourcing equilibrium compared to the situation where neither firm does outsourcing, and this holds irrespective of the intensity of competition. We show that whether international outsourcing is likely to reduce profit under more intense competition (measured by the degree of product differentiation, number of firms and the type of product market competition, namely, Cournot and Bertrand competition) is ambiguous. We further show that international outsourcing may be socially 'excessive' for the sourced country and for the world.

Publication metadata

Author(s): Marjit S, Mukherjee A

Publication type: Article

Publication status: Published

Journal: Journal of International Trade and Economic Development

Year: 2008

Volume: 17

Issue: 1

Pages: 21-35

Print publication date: 01/03/2008

ISSN (print): 0963-8199

ISSN (electronic): 1469-9559

Publisher: Routledge

URL: http://dx.doi.org/10.1080/09638190701727786

DOI: 10.1080/09638190701727786

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