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Empirical Economics

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01-11-2014

Outsourcing and firm productivity: a production function approach

Author: Alberto López

Published in: Empirical Economics | Issue 3/2014

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Abstract

This paper is aimed at analyzing the relationship between outsourcing and productivity. Specifically, this paper deals with outsourcing at the firm level and focuses on the role of contracting out of manufacturing activities. I obtain new insights on this topic, mainly using a precise measure for outsourcing and analyzing differences across industries. Using an unbalanced panel of Spanish manufacturing firms, I estimate a production function depending on traditional inputs (labor, capital, and materials) and an index of production subcontracting. I find that for manufacturing as a whole, outsourcing intensity has a positive effect on productivity, showing an elasticity of output with respect to outsourcing around 0.15. When analyzing industry level results, I find that outsourcing intensity has a positive effect on productivity, mainly for firms belonging to light industries.

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For example, the Oslo Manual (OECD 2005) considers the implementation of new ways of organizing relations with other firms such as the outsourcing or subcontracting to be an organizational innovation.

These industrial services includes activities such as processing of inputs which are then sent back to the establishment for final assembly or sales, maintenance of production machinery, and engineering or drafting services.

I adopt a production function approach because this paper focuses on the relationship between outsourcing and productivity. The estimation of the production function is commonly used in the analysis of productivity (see Ackerberg et al. 2007).

This substitution is commonly used in the context of the logit transform \( {\text {log}}(\frac{z}{1-z}) \), where z is a share ranging from 0 to 1 (see Hall 2011). This issue is related to the estimation of a Cobb–Douglas production function with zero input levels. Empirical literature proposes three main solutions to this problem (see Moss 2000): (i) substituting a small nonzero value for the zero observations; (ii) using a functional form that allows for zero inputs (such as a quadratic production function); and (iii) bootstrapping.

I consider 11 industries. Industry breakdown is defined in Appendix 2.

See Blundell and Bond (2000); and Griliches and Mairesse (1998) for a discussion about this problem.

As I said in Sect. 3, ratio \(\frac{\text {sr}}{1-\text {sr}}\) is an index of production subcontracting. It is not a direct measure of subcontracted purchases, and therefore, measuring the quantitative contribution of outsourcing is not straightforward.

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Title: Outsourcing and firm productivity: a production function approach
Author: Alberto López
Publication date: 01-11-2014
Publisher: Springer Berlin Heidelberg
Published in: Empirical Economics / Issue 3/2014
Print ISSN: 0377-7332
Electronic ISSN: 1435-8921
DOI: https://doi.org/10.1007/s00181-013-0770-x

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