Markup responses to international outsourcing: an empirical analysis

Details

Supervisors

Vannoorenberghe, Gonzague ; Ottaviano, Gianmarco

Faculty

Faculté des sciences économiques, sociales, politiques et de communication

Degree label

Master [120] en sciences économiques, orientation générale

Abstract

International outsourcing has been sharply increasing since the past half-century, giving rise to various debates and to different and often controversial predictions about its effects on the economy. In particular, while entailing most of the advantages derived from globalization, it has been argued that outsourcing agreements might also result in higher firms’ market power and eventually trigger competition. In this regard, the aim of this thesis is to empirically investigate the channels through which international outsourcing may eventually affect outsourcing firms’ markup. In particular, assuming a monopolistic competition set up, I identify two main mechanisms through which international outsourcing may affect markup. On one hand, markups might increase thanks to the reduction in marginal costs and productivity gains. On the other hand, international outsourcing might affect markups through demand and price. Indeed, by outsourcing non-core activities, firms can specialize in core competencies while gaining access to higher quality inputs. In doing so, they can eventually produce differentiated and higher quality goods, which in turns allows targeting consumers with higher willingness to pay. Using firm-level data from the EFIGE-AMADEUS dataset about 14.169 European firms in 2008, I try to disentangle the two channels and empirically test whether there is evidence of the direct effect of outsourcing that does not operate through total factor productivity (TFP) gains. In order to account for self-selection in internationalization, I employ a propensity scores matching model . Results highlight a non-significant positive correlation between outsourcing and markup. When adding the control for TFP in order to isolate the competitive channel, productivity is found to be highly significant while there is still no evidence for an effect of outsourcing. However, when looking for a causal relationship and addressing self-selection in internationalization through matching, findings suggest that size-driven self-selection can be an issue. Results confirm the positive relationship between outsourcing and markup, even though the significance of the effect considerably depends on the statistical command used for performing matching. Indeed, with the standard user-written command for propensity score matching in Stata, the average treatment effect on the treated is not significant at the usual confidence levels. However, when switching to a more precise and recently developed command, there is significant evidence for a positive direct effect of outsourcing on markup, which goes beyond TFP gains and is not biased by self-selection.