Outsourcing and Innovation: An Empirical Exploration of the Dynamic Relationship

Robert Breunig and Sasan Bakhtiari

The B.E. Journal of Economic Analysis & Policy, 2013, vol. 13, issue 1, 395-418

Abstract: 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 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (5)

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DOI: 10.1515/bejeap-2012-0016

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