Outsourcing and Firm Productivity

I attempt to identify a causal link between the outsourcing of parts of the production process and firm productivity for a large panel of Irish manufacturing firms. Outsourcing is taken to mean the procure-ment of inputs from outside the boundaries of the firm, with interna-tional outsourcing being outsourcing from a foreign provider. Theory suggests that as firms outsource more ‘non-core ’ activities to special-ized providers, productivity will increase along two channels: in the short-run, the firm will benefit from cheaper or higher-quality inputs, while in the medium term the firm will be able to reallocate resources towards higher value-added activities. The international outsourcing case adds another dimension, in that firms that outsource from abroad can experience further productivity gains from the higher quality and variety of inputs on offer and from exposure to new technologies, prac-tices and knowledge. I test the above hypothesis using a “System GMM ” estimator to control for endogeneity in the panel and allow for a lagged dependent variable to be a regressor. I find that in-ternational outsourcing leads to productivity gains, but upon closer inspection that firms ’ international orientation and type of industry both matter