Productivity effects of outsourcing New evidence on the strategic importance of vertical integration decisions

Purpose - The purpose of this paper is to present an empirical investigation of firm level productivity effects of outsourcing against the background of a review of recent theoretical considerations about the topic. Design/methodology/approach - The empirical research is based on a large representative data set from the Gentian manufacturing industries containing detailed data about almost 500 establishments. It investigates productivity effects of outsourcing under control of other relevant factors influencing firm level productivity by means of a multivariate regression analysis. Findings - In sharp contrast to common belief and prevailing management practices, outsourcing, i.e. the extent to which the vertical range of manufacturing is reduced, has a strong negative impact on a firm's labour productivity. Against the background of the theoretical considerations reviewed from the literature, this result can be explained such that mere cost-efficiency comparisons are insufficient for appropriate decisions on vertical manufacturing range as the effects of opportunism, of disturbed competence fort-nation, and of limited innovative value creation processes may be overcompensating cost benefits. Research limitations/implications - The investigation focuses on productivity effects of outsourcing as a relevant long-term performance measure not regarding other firm level performance indicators. Although covering a significant range of industrial sectors in Germany, more empirical evidence is needed from other sectors and regions. Moreover, performance effects of different types, of outsourcing implementations (e.g. simple part supply versus outsourcing of whole business processes including design, production, and marketing) should be investigated as they might have different impacts. Practical implications - The findings strongly recommend a revision of established decision-making schemes for vertical manufacturing range based on cost-efficiency considerations. Decision making should instead integrate cost efficiency and transaction cost analysis with the competence and innovation capability formation perspectives. Procedural schemes for this integrated view are still to be developed, however. Originality/value - The research described in this paper considerably widens the empirical knowledge about productivity effects of outsourcing and has strong impact on management practice.