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Kiel Institute for World Economics Kiel Working Papers, Kiel Institute for World Economics

No 1417:
Services Outsourcing and Innovation: An empirical investigation

Holger Görg and Aoife Hanley

Abstract: We provide a comprehensive empirical analysis of the links between international services outsourcing, domestic outsourcing, profits and innovation using plant level data. We find a positive effect of international outsourcing of services on innovative activity at the plant level. Such a positive effect can also be observed for domestic outsourcing of services, but the magnitude is smaller. This makes intuitive sense, as international outsourcing allows more scope for exploiting international factor price differentials, therefore giving the establishment higher profits and more scope to restructure production activities towards innovation. We also find that international outsourcing has a positive effect on profitability, as predicted by theory, while this is not true for domestic sourcing. The results are robust to various specifications and an instrumental variables analysis

Keywords: international services outsourcing, innovation, R&D; (follow links to similar papers)

JEL-Codes: F14,; O31; (follow links to similar papers)

26 pages, April 2008

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