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In many modern U.S. industries the following patterns seem to hold:(a) Small firms are more likely to outsource production of inputs than are large firms;(b) Standard inputs (such as a simple transistor that could be used by several electronics manufacturers) are more likely to be outsourced than tailor made inputs (such as a circuit board designed for a single manufacturers specific needs).What factors might explain these patterns?
The reason behind the first observation is that small firms find it more optimizing in terms of their costs to outsource the production of inputs. The alternative of self production of inputs is a bigger cost constraint to them as they are themselves small in terms of operations. Therefore, the cost minimization optimal strategy requires them to fetch outsourced inputs The larger firms on the other hand, are self sustaining to produce the inputs themselves and operate under the economies of scale due to which they have lower average cost of production. This enables them to produce the inputs themselves. The reason for the second observation is that the standard inputs are those which do not…

quire too much of specialization or customization from the firms point of view. Therefore, they find it easier to outsource them to other firms. On the other hand, the more mechanized or customized tailor-made inputs are those which the firms would require to keep the specifications to themselves and not get them exposed for fear of release of expertise inputs. Thus, they prefer to produce them on their own rather than getting them outsourced.



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