Abstract
Based on a unique dataset concerning small firms operating in the machinery and equipment industry in Emilia Romagna (Italy), we estimate the separate effects of social capital and local market size on the probability to either fully or partially outsource parts of the production process. We are able to distinguish 29 different phases of the production cycle, from design, to early processing to post-production. Our estimates show that: (1) social capital influences the full outsourcing of core assembly and post-assembly activities, while local market size affects the full outsourcing of early processing activities; (2) neither social capital nor local market size have a statistically significant effect on the probability of partially outsourcing any step of the production process. Robustness tests confirm our results vis-a-vis the endogeneity of the local market size and social capital, and the potential Modifiable Area Unit Problem relating to local market size.
Highlights
Outsourcing can be considered as one of the most complex organizational decisions, for entrepreneurial organizations
We found no statistically significant effect for Local market size or Social capital
When we looked at the estimated IV coefficient of social capital, we found that it remained statistically significant and positive, even though the Wald test did not reject the null hypothesis of exogeneity of the instrumented variable, so a standard probit or logit model was appropriate
Summary
Outsourcing can be considered as one of the most complex organizational decisions, for entrepreneurial organizations. While outsourcing can give entrepreneurs the chance to focus on core competencies and exploit previously unexplored market opportunities, it can lead to potential losses of knowledge and to external dependencies These problems seem to be even more important in the case of small and medium entrepreneurial firms that must carefully evaluate the balance of the benefits and costs of outsourcing. The study of outsourcing as a strategy for an efficient business management and for an efficient (spatial) division of labor has been implemented less in the field of entrepreneurship (Davari and Rezazadeh 2015), and the concept of entrepreneurial outsourcing has been elaborated only recently This latter is conceived as the practices and processes that can lead to the development of new products and services, or a sustainable competitive advantage, through outsourcing (Murphy et al 2012). Since outsourcing can give rise to new business opportunities, it becomes crucial to identify the factors underlying this decision, not just referring to firm’s internal functions, and looking at the features of the external environment
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