Small Manufacturing Firm Business Services Externalization in the Chicago Metropolitan Region

This paper examines one aspect of emerging urban industrial systems: the extemalization, or out-sourcing, of business services from the manufacturing sector. Drawing upon Williamson's ( 1975,1990) seminal research on transaction costs economics, the paper demonstrates conceptually that externalization is integrally linked to the vertical disintegration of firms. The empirical portion of the paper uses surveys of small manufacturers located in the Chicago metropolitan region to identify the extent to which five basic business services are externalized. Thereafter, two logit models are developed to evaluate the influence of factors that may contribute to the externalization of basic services. The modeling results indicate that the size of firms and their previous extemalization experience significantly influence the externalization decision.