Outsourcing and Innovation: An Empirical Exploration of the Dynamic Relationship

Robert V. Breunig; Sasan Bakhtiari

doi:10.1515/bejeap-2012-0016

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Outsourcing and Innovation: An Empirical Exploration of the Dynamic Relationship

Robert V. Breunig and Sasan Bakhtiari

Published/Copyright: April 23, 2013

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From the journal The B.E. Journal of Economic Analysis & Policy Volume 13 Issue 1

Abstract: We study the implications of vertical integration on innovation performance using firm-level data in Australian manufacturing. We use the data to distinguish between low-cost-oriented and innovation-oriented outsourcing. Outsourcing without innovation lowers the costs at the expense of damaging the future chances of innovation, while innovation-oriented outsourcing leads to higher costs but increases the likelihood of future innovation. For firms that innovate and outsource, the probability of future innovation is 49% compared to 8% for those who outsource without innovating. Comparing across firms that innovate, simultaneous outsourcing increases the probability of future innovation by 5%. Innovation-oriented outsourcing is accompanied with firms shifting expenditure to research and development. Our results offer strong support that outsourcing may be used not just as a cost-cutting strategy, but as a part of a comprehensive firm strategy to innovate and improve.

Keywords: outsourcing; innovation; business strategy; R&D

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1
Benson and Ieronimo (1996) survey 26 Australian manufacturing firms with an average of 2,000 employees in 1994 (the beginning of our sample period) and find that the main body of outsourced jobs by those firms are tasks such as maintenance, janitorial services, and transportation that need physical presence.
2
The fiscal year in Australia is from beginning July to end of June the following year, hence the use of two-year combinations.
3
The ABS Business Counts (Cat.No.8165.0 at http://www.abs.gov.au) show that only about 1% of manufacturing firms in Australia have more than 200 employees.
4
For full information on the population frame, sampling strategy, survey and available data items, see the Technical Manual, ABS Catalogue Number 8141.0.15.001 at http://www.abs.gov.au.
5
Cat.No.6401.0 at http://www.abs.gov.au provides CPI figures for Australia.
6
The exact question is: Did this business: (i) develop any new products; or (ii) introduce any substantially changed products; or (iii) develop or introduce any new or substantially changed processes.
7
The length of the panel and the fact that outsourcing was not included in 1997–1998 prevents us from looking at longer lags.
8
A small number of firms report zero wages in some years, and most of them have only one or two personnel. We regard these jobs as self-employment, and to include those firms, we use, in which is the average real wage per employee.
9
The coefficient estimates which produce this table are available upon request from the authors.
10
To understand the behavior of these firms, the marginal effects from the last three rows of Table 10 need to be summed together.

Published Online: 2013-04-23

Published in Print: 2013-07-01

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Articles in the same Issue

https://doi.org/10.1515/bejeap-2012-0016

Keywords for this article

outsourcing; innovation; business strategy; R&D