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Outsourcing and Innovation: An Empirical Exploration of the Dynamic Relationship

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  • V. Breunig Robert

    () (Crawford School of Public Policy, Australian National University, Canberra, ACT, Australia)

  • Bakhtiari Sasan

    () (Australian School of Business, University of New South Wales, Sydney NSW, Australia)

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.

Suggested Citation

  • V. Breunig Robert & Bakhtiari Sasan, 2013. "Outsourcing and Innovation: An Empirical Exploration of the Dynamic Relationship," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 13(1), pages 395-418, April.
  • Handle: RePEc:bpj:bejeap:v:13:y:2013:i:1:p:395-418:n:3
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    References listed on IDEAS

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    1. Stefano Federico, 2010. "Outsourcing versus Integration at Home or Abroad," Temi di discussione (Economic working papers) 742, Bank of Italy, Economic Research and International Relations Area.
    2. Alan S. Blinder & Alan B. Krueger, 2013. "Alternative Measures of Offshorability: A Survey Approach," Journal of Labor Economics, University of Chicago Press, vol. 31(S1), pages 97-128.
    3. Papke, Leslie E & Wooldridge, Jeffrey M, 1996. "Econometric Methods for Fractional Response Variables with an Application to 401(K) Plan Participation Rates," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(6), pages 619-632, Nov.-Dec..
    4. Stefano Federico, 2010. "Outsourcing versus integration at home or abroad and firm heterogeneity," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 37(1), pages 47-63, February.
    5. repec:pri:cepsud:190blinder is not listed on IDEAS
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    Cited by:

    1. Fritsch, Ursula, 2015. "Is Offshoring Beneficial or Detrimental to Innovation in Developed Countries?," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112973, Verein für Socialpolitik / German Economic Association.
    2. Baatartogtokh, Baljir & Dunbar, W. Scott & van Zyl, Dirk, 2018. "The state of outsourcing in the Canadian mining industry," Resources Policy, Elsevier, vol. 59(C), pages 184-191.
    3. Bakhtiari Sasan, 2016. "Assortative Outsourcing with Exit," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 16(1), pages 119-142, January.
    4. Sasan Bakhtiari, 2015. "Productivity, outsourcing and exit: the case of Australian manufacturing," Small Business Economics, Springer, vol. 44(2), pages 425-447, February.
    5. Sasan Bakhtiari & Robert Breunig, 2017. "New Outsourcing, Demand Uncertainty and Labor Usage," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 50(1), pages 69-90, February.

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