The Growth of Producer Services Industries: Sorting Through the Externalization Debate

The development of a theory for explaining why firms externalize producer services functions is critical to gaining a better understanding of why the producer services industries have enjoyed robust growth within the United States, Canada and the European Community. Scholars of the service economy have attempted to develop explanations for the externalization of producer services functions. These explanations constitute “the externalization debate” since there has been a lack of consistency and agreement as to how and why externalization is taking place. None of the explanations for externalization approach what could be termed a theory of producer services externalization, since they consist of empirical generalizations that are not deductively connected. This paper attempts to move one step toward the development of such a theory by constructing a more comprehensive and systematic conceptual approach to analyzing the extemalization of producer services functions. The motivating factors for externalization that are proposed in the externalization debate are systematically examined. The insights of the transaction cost and production subcontracting literatures are then discussed and the implications of these literatures for producer services externalization are examined. A synthesis of the insights provided by these research literatures is then used to develop a more comprehensive analytical framework for examining producer services extemalization.