Does Outsourcing Increase Profitability?

Abstract

We investigate the relationship between outsourcing and profitability paying particularattention to the endogeneity of outsourcing. The empirical analysis uses unique plant leveldata for the electronics sector in Ireland. A particular feature of the data is that it recordsdetailed information for 12 electronics sub-sectors covering both manufacturing and servicesactivities. We distinguish outsourcing of materials from outsourcing of services inputs. Wefind that plants that are substantially larger than the mean employment size benefit fromoutsourcing materials and services inputs, while this does not appear to be the case for smallplants. Results for outsourcing of services are not as clear-cut, however.

Keywords: outsourcing, subcontracting, profitability, electronics

JEL Classification: L23, L63