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Outsourcing and Innovation: An Empirical Exploration of the Dynamic Relationship

Author

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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
    DOI: 10.1515/bejeap-2012-0016
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    References listed on IDEAS

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    1. 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.
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    4. Dube, Arindrajit & Kaplan, Ethan, 2008. "Does Outsourcing Reduce Wages in the Low Wage Service Occupations? Evidence from Janitors and Guards," Institute for Research on Labor and Employment, Working Paper Series qt6s89498v, Institute of Industrial Relations, UC Berkeley.
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    8. 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.
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    Cited by:

    1. Fritsch, Ursula, 2015. "Is Offshoring Beneficial or Detrimental to Innovation in Developed Countries?," VfS 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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