Outsourcing and Innovation: An Empirical Study of Causes and Effects

Sasan Bakhtiari () and Robert Breunig
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Sasan Bakhtiari: The University of New South Wales

No 2012-35, Discussion Papers from School of Economics, The University of New South Wales

Abstract: We study the implications of vertical integration on innovation performance using firm-level data on Australian manufacturing. We use the data to distinguish between low-cost-oriented and innovation-oriented outsourcing. Outsourcing without innovation lowers 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 54 per cent compared to 15 per cent for those who outsource without innovating. Comparing across firms that innovate, simultaneously outsourcing increases the probability of future innovation by 4 per cent. Innovation-oriented outsourcing is accompanied by firms shifting focus to research and marketing of new products. Our results offer strong support that outsourcing may be used not just as a cost-cutting strategy, but as part of comprehensive firm strategy to innovate and improve.

Keywords: Outsourcing; Innovation; Firm Performance; Business Strategy. (search for similar items in EconPapers)
JEL-codes: D22 L21 L24 L6 (search for similar items in EconPapers)
Pages: 24pages
Date: 2012-09
New Economics Papers: this item is included in nep-cse, nep-ino, nep-knm and nep-sbm
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