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Productivity effects of outsourcing
New evidence on the strategic importance of vertical integration decisions
Peter Broedner, Steffen Kinkel and Gunter Lay
Fraunhofer Institute Systems and Service Innovation, Karlsruhe, Germany
Abstract
Purpose – The purpose of this paper is topresent an empirical investigation of firm level productivity effects of outsourcing against the background of a review of recent theoretical considerations about the topic. Design/methodology/approach – The empirical research is based on a large representative data set from the German manufacturing industries containing detailed data about almost 500 establishments. It investigates productivityeffects of outsourcing under control of other relevant factors influencing firm level productivity by means of a multivariate regression analysis. Findings – In sharp contrast to common belief and prevailing management practices, outsourcing, i.e. the extent to which the vertical range of manufacturing is reduced, has a strong negative impact on a firm’s labour productivity. Against the background of thetheoretical considerations reviewed from the literature, this result can be explained such that mere cost-efficiency comparisons are insufficient for appropriate decisions on vertical manufacturing range as the effects of opportunism, of disturbed competence formation, and of limited innovative value creation processes may be overcompensating cost benefits. Research limitations/implications – Theinvestigation focuses on productivity effects of outsourcing as a relevant long-term performance measure not regarding other firm level performance indicators. Although covering a significant range of industrial sectors in Germany, more empirical evidence is needed from other sectors and regions. Moreover, performance effects of different types of outsourcing implementations (e.g. simple part supplyversus outsourcing of whole business processes including design, production, and marketing) should be investigated as they might have different impacts. Practical implications – The findings strongly recommend a revision of established decision-making schemes for vertical manufacturing range based on cost-efficiency considerations. Decision making should instead integrate cost efficiency andtransaction cost analysis with the competence and innovation capability formation perspectives. Procedural schemes for this integrated view are still to be developed, however. Originality/value – The research described in this paper considerably widens the empirical knowledge about productivity effects of outsourcing and has strong impact on management practice. Keywords Outsourcing, Manufacturingindustries, Productivity rate, Labour efficiency, Multivariate analysis, Germany Paper type Research paper

Productivity effects of outsourcing 127
Received March 2007 Revised May 2008, August 2008 Accepted September 2008

Introduction Corporate restructuring activities have become a common management practice over the past two decades. In particular, outsourcing of manufacturing processes, regardedby management as not belonging to the “core business”, has meanwhile spread as

International Journal of Operations & Production Management Vol. 29 No. 2, 2009 pp. 127-150 q Emerald Group Publishing Limited 0144-3577 DOI 10.1108/01443570910932020

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a ubiquitous phenomenon in the manufacturing industries. Yet these popular management practices have so far been givensurprisingly little attention in the academic literature. There are, of course, a number of articles dealing with issues of making strategic restructuring and vertical integration decisions. Many of them develop conceptual models, though, based on anecdotal- or case-based evidence to support assertions in attempting to explain the rationale behind those decisions. They either focus on transaction cost...