The Effect of Recessions on Firms' Insourcing- and Outsourcing Decisions
Abstract: This paper analyzes the effects of a major economic crisis on firms’ boundary decisions. More specifically we use the economic theory of the firm to derive a number of hypotheses regarding the influence of decreasing demand and supply of risk willing capital on firms’ decisions to in-and outsource activities. We test these hypotheses using an original data set from a survey conducted among Norwegian firms. We find that in-and out sourcing decisions depend on whether activities were core to the firm and whether they are characterized by asset specificity. Further, we find that core activities are sensitive to both reductions in demand and reductions in access to credit, while non-core activities only are sensitive to demand reduction. In addition, we find a negative interaction effect between reduction in demand and reductions in access to credit for insourcing of core activities. We argue that the latter finding indicate that reductions in demand increases firms’ incentives to vertically integrate core activities, but that its ability to do so depends on their access to credit.