Outsourcing and Innovation: An Empirical Study of Causes and Effects

B.E. Journal of Economic Analysis and Policy, 14(1), 395-418

24 Pages Posted: 6 Sep 2012 Last revised: 21 Jul 2015

See all articles by Sasan Bakhtiari

Sasan Bakhtiari

Australian Department of Industry; Crawford School, ANU

Robert V. Breunig

Australian National University (ANU) - Crawford School of Public Policy

Date Written: May 1, 2012

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

JEL Classification: D22, L21, L24, L6

Suggested Citation

Bakhtiari, Sasan and Breunig, Robert V., Outsourcing and Innovation: An Empirical Study of Causes and Effects (May 1, 2012). B.E. Journal of Economic Analysis and Policy, 14(1), 395-418. Available at SSRN: https://ssrn.com/abstract=2140662 or http://dx.doi.org/10.2139/ssrn.2140662

Sasan Bakhtiari (Contact Author)

Australian Department of Industry ( email )

341 George Street
Sydney, NSW 2000
Australia

HOME PAGE: http://sites.google.com/site/sasanbakhtiari

Crawford School, ANU ( email )

7 Liversidge Street
Lennox Crossing
Canberra, ACT 0200
Australia

HOME PAGE: http://sites.google.com/site/sasanbakhtiari

Robert V. Breunig

Australian National University (ANU) - Crawford School of Public Policy ( email )

7 Liversidge Street
Lennox Crossing
Canberra, ACT 0200
Australia
61261252148 (Phone)

HOME PAGE: http://https://crawford.anu.edu.au/crawford_people/content/staff/rbreunig.php

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