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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Notes
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.
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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Acknowledgments
I would like to thank José Carlos Fariñas and Jordi Jaumandreu for their valuable suggestions and discussion. I also wish to acknowledge useful comments by Saul Lach and Frank Verboven, and by the audiences at the 32nd EARIE meeting and at the 23rd Annual Congress of the European Economic Association. I thank the editor, Subal C. Kumbhakar, and two anonymous referees for useful comments. I acknowledge financial support from the Ministerio de Ciencia e Innovación (Spain) project ECO2010-18947, and from Fundación Banco Herrero. Errors are mine.
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Appendices
Appendix 1: definitions of variables
- Capital stock :
-
Capital at current replacement values is computed recursively from an initial estimate and the data on firms’ investments in equipment goods (but not buildings or financial assets), actualized by means of a price index of capital goods, and using sectorial estimates of the rates of depreciation. Real capital is then obtained by deflating the current replacement values.
- Entrant firm :
-
Dummy variable that takes the value 1 when the firm has been created during the period.
- Exiting firms :
-
Dummy variable that takes the value 1 when the firm is going to exit during the period (stop activity or stop manufacturing).
- Hours of work :
-
Total normal hours of work plus overtime minus lost hours, computed by multiplying hours per worker by the number of workers.
- Hours per worker :
-
Normal hours of work plus overtime minus lost hours per worker.
- Industry dummies :
-
Eighteen industry dummies (ESEE Industries. See Appendix 2).
- Intermediate consumption :
-
Sum of purchases of materials and external services minus the variation of intermediate inventories. Nominal intermediate consumption is deflated by the firm’s specific price index of intermediate consumption.
- Merger and acquisition :
-
Dummy variable that takes the value 1 in the years subsequent to a merger or acquisition.
- Output :
-
Goods and services production. Sales plus the variation of inventories deflated by the firm’s output price index.
- Proportion of temporary workers :
-
Ratio between temporary workers and total number of workers.
- Price :
-
Paasche-type price index computed by starting from the percentage price changes that the firm reports to have made in the markets in which it operates.
- consumption :
-
Paasche-type price index computed by starting from the percentage variations in the prices of purchased materials, energy and services reported by the firms.
- Scission :
-
Dummy variable that takes the value 1 in the years subsequent to a scission.
- Subcontracted purchases :
-
Purchases of elaborated products or customized components. Nominal subcontracted purchases are deflated by the firm’s specific price index of intermediate consumption.
- Workers :
-
Approximation of the average number of workers during the year.
Appendix 2: industry definitions
NACE code (3-digit) | ESEE Industries | Industry breakdown |
|---|---|---|
221 to 224 | Ferrous and non-ferrous metals | Metals and metal products |
311 to 319 | Metal products | |
240 to 249 | Non-metallic mineral products | Non-metallic minerals |
251 to 255 | Chemical products | Chemical products |
481, 482 | Rubber and plastic products | |
321 to 329 | Industrial and agricultural machinery | Ind. and agric. machinery |
330, 391 to 399 | Office and data processing machinery | Office mach. and elec. goods |
341 to 347 | Electrical goods | |
351 to 355 | ||
361 to 363 | Motor vehicles | Transport equipment |
371, 372 | Other transport equipment | |
381 to 389 | ||
413 | Meats, meat preparation | Food, drink and tobacco |
411, 412 | Food products and tobacco | |
414 to 423, 429 | ||
424 to 428 | Beverages | |
431 to 439 | Textiles and clothing | Textile, leather and shoes |
453 to 456 | ||
441, 442 | Leather and leather products | |
451, 452 | ||
461 to 468 | Timber, wood products | Timber and furniture |
471 to 475 | Paper and printing products | Paper and printing products |
491 to 495 | Other manufacturing products | Other manufacturing products |
Appendix 3
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López, A. Outsourcing and firm productivity: a production function approach. Empir Econ 47, 977–998 (2014). https://doi.org/10.1007/s00181-013-0770-x
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DOI: https://doi.org/10.1007/s00181-013-0770-x