The causal effect of institutional quality on outsourcing

We empirically investigate the relationship between institutional quality and outsourcing to developing economies. To examine the within-country time trend, in contrast to previous cross-sectional studies, this article constructs a time-varying industry-based outsourcing proxy for 89 countries over 25 years (1980--2004). The resulting panel data allow us to identify the causal relationship by controlling for the fixed effects and dynamic factors. We find a significant positive effect of local institutional improvements on outsourcing within lower-middle income countries. In low, upper-middle and high income developing countries, institutional quality is not an important determinant of international outsourcing.