Economies of Scope and Patterns of Outsourcing

The paper suggests that the evolution of modern technologies in manufacturing, from economiesof-scale to economies-of-scope, plays a key role in the increasing outsourcing activities. It is shown that the divergence in the degrees of economies-of-scope and the attribute space of the products between different stages of production is the fundamental economic force behind the recent trend of outsourcing activities. It also finds that outsourcing occurs in the following two opposite scenarios: either (i) the degree of economies-of-scope is very high and the attribute space is very small (i.e., close to a homogenous good); or (ii) the degree of economies-of-scope is very low and the attribute space is very large (i.e. highly specialized input/service). Furthermore, technology progress that reduces market transaction costs always increases outsourcing; technology progress that improves production techniques, however, could either increase or decrease outsourcing. JEL Classification No.: L22, F2