Abstract
Flexibility in response to competitive pressure from globalized markets and increasingly individualized costumer desires has become vital for firms. A common strategy to address this challenge is to employ a dynamic concept of organization and reach beyond the boundaries of the firm. Accordingly, technology transfer from providers of knowledge-intensive business services attracts more and more attention.
In this context, we focus on external supply of information technology and client-side innovation. The aim of this chapter is to contribute to resolving an empirical puzzle arising from the prior literature. Some authors find beneficial effects of IT outsourcing, others underline that firms often fail to achieve expected strategic goals.
Our stylized theoretical model combines a knowledge production function framework and transaction cost economics. We hypothesize that the right balance between internal and external knowledge is critical for innovation.
The empirical application is German firm-level data covering a wide range of industries, 2003–2006. Our results largely support the theoretical arguments and suggest a positive linear relationship between the level of outsourcing and process innovation. For product innovation, we find a hump shape.
Keywords
- Information Technology
- Process Innovation
- Product Innovation
- External Knowledge
- Transaction Cost Economic
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.
This is a preview of subscription content, access via your institution.
Buying options
Notes
- 1.
KIBS are defined as firms from the NACE 72–74 sectors, that is, computer and related activities, research and development, and other business services such as legal services, accounting, and advertising (Muller and Doloreux 2009).
- 2.
Note that we are not considering a cost of implementation, such as liquidity constraints or advertising. That is, we implicitly assume this cost C to be zero in Prob(K – C > τ).
- 3.
For simplicity, we set K 0 = 0 and t = E = 1, such that \( K=1-{c}_{w,s}\forall \omega \rm{ }\in \{\theta =0,\theta =0.5,\theta =1\}\).
- 4.
See Fig. 10.7 for a plot of the three dimensions: K, s, and \( \theta \).
- 5.
Those IT services are installation of new hard- and software, system support and maintenance, support help desk, software development, Internet/web maintenance and design, IT training, IT security and on-demand computing.
- 6.
Descriptive statistics on IT intensity can be found in Table 10.1.
- 7.
See Acs and Audretsch (2003) for a summary of key issues in the empirical literature in favor of a firm size effect on innovation.
- 8.
See Table 10.4 for an industry classification.
- 9.
In some sense, this is in line with the literature on productivity gaps between East and West Germany. See, for example, Smolny (2012).
- 10.
A test with the null of a U shape (negative slope at the lower bound and positive slope at the upper bound) or monotone function (sign of the slope is equal at both bounds) can be rejected for γ > 0.4. See Lind and Mehlum (2010) for a description of the test.
- 11.
The fact that the coefficients are insignificant in the respective other specification can be explained by looking at the descriptive statistics in Table 10.1. First, the proportion of firms that report product innovation at the lower end of the outsourcing level does not largely differ from those at the upper end. Second, although there is a kink in the proportion of firms reporting process innovation for a medium level of outsourcing, differences between the lower and the upper end are rather substantial. Figures 10.8–10.11 further illustrate our findings.
References
Acs Z, Audretsch D (2003) Innovation and technological change. In: Acs Z, Audretsch D (eds) Handbook of entrepreneurship research – an interdisciplinary survey and introduction. Springer, New York, pp 55–79
Acs Z, Audretsch D, Feldman M (1994) R&D spillovers and recipient firm size. Rev Econ Stat 76(2):336–340
Afuah A (2001) Dynamic boundaries of the firm: are firms better off being vertically integrated in the face of a technological change. Acad Manage J 44(6):1211–1228
Amiti M, Wei SJ (2006) Service offshoring and productivity: evidence from the United States. NBER working paper:11926
Antonelli C (1998) Localized technological change, new information technology and the knowledge-based economy: the European evidence. J Evol Econ 8(2):177–198
Antràs P, Helpman E (2004) Global sourcing. J Polit Econ 112(3):552–580
Arora A, Gambardella A (1990) Complementarity and external linkages: the strategies of the large firms in biotechnology. J Ind Econ 38(2):361–379
Audretsch D, Acs Z (1991) Innovation and size at the firm level. South Econ J 57(3):739–744
Audretsch D, Menkveld A, Thurik A (1996) The decision between internal and external R&D. J Instit Theor Econ 152:519–530
Audretsch D, Hülsbeck M, Lehmann E (2012) Regional competitiveness, university spillovers, and entrepreneurial activity. Small Bus Econ, 39(3):587–601
Bacheldor B (2010) Innovation in outsourcing: you want IT. Do you get it. CIO Magazine. http://tinyurl.com/bacheldor10
Baldwin J, Gu W (2004) Trade liberalization: export-market participation, productivity growth, and innovation. Oxf Rev Econ Pol 20(3):372–392
Barras R (1986) Towards a theory of innovation in services. Res Pol 15(4):161–173
Barthélemy J (2001) The hidden costs of IT outsourcing. MIT Sloan Manage Rev 42(3):60–69
Bauernschuster S, Falck O, Heblich S (2009) Training and innovation. J Hum Cap 3(4):323–353
Becker S, Egger P (forthcoming) Endogenous product versus process innovation and a firms propensity to export. Empir Econ
Bertschek I (1995) Product and process innovation as a response to increasing imports and foreign direct investment. J Ind Econ 63(4):341–357
Bessant J, Rush H (1995) Building bridges for innovation: the role of consultants in technology transfer. Res Pol 24(1):97–114
Cantwell J, Fai F (1999) Firms as the source of innovation and growth: the evolution of technological competence. J Evol Econ 9(3):331–366
Cassiman B, Veugelers R (2006) In search of complementarity in innovation strategy: internal R&D and external knowledge acquisition. Manage Sci 52(1):68–82
Cohen W, Levinthal D (1989) Innovation and learning: the two faces of R&D. Econ J 99(397):569–596
Czarnitzki D, Spielkamp A (2003) Business services in Germany: bridges for innovation. Serv Ind J 23(2):1–31
Dibbern J, Goles T, Hirschheim R, Jayatilaka B (2004) Information systems outsourcing: a survey and analysis of the literature. SIGMIS Database 35(4):6–102
Eaton J, Kortum S (2006) Innovation, diffusion, and trade. NBER working paper:12385
Engelstätter B, Sarbu M (2010) Enterprise software and service innovation: standardization versus customization. ZEW discussion paper 10–100
Flaig G, Stadler M (1994) Success breeds success. The bynamics of the innovation process. Empir Econ 19(1):55–68
Freund C, Weinhold D (2002) The internet and international trade in services. Am Econ Rev 92(2):236–240
Geroski PA, Walters CF (1995) Innovative activity over the business cycle. Econo J 105(431):916–928
Gooroochurn N, Hanley A (2007) A tale of two literatures: transaction costs and property rights in innovation outsourcing. Res Pol 36(10):1483–1495
Görg H, Hanley A (2011) Services outsourcing and innovation: an empirical investigation. Econ Inq 49(2):321–333
Griliches Z (1979) Issues in assessing the contribution of research and development to productivity growth. Bell J Econ 10(1):92–116
Grimpe C, Kaiser U (2010) Balancing internal and external knowledge acquisition: the gains and pains from R&D outsourcing. J Manage Stud 47(8):1483–1509
Grossman G, Helpman E (2002) Integration versus outsourcing in industry equilibrium. Q J Econ 117(1):85–120
Grossman G, Helpman E (2005) Outsourcing in a global economy. Rev Econ Stud 72(1):135–159
Han K, Kauffman R, Nault B (2011) Returns to information technology outsourcing. Information Systems Research, 22(4):824–840
Harrigan K (1984) Formulating vertical integration strategies. Acad Manage Rev 9(4):638–652
Hecker A, Kretschmer T (2010) Outsourcing decisions: the effect of scale economies and market structure. Strat Organ 8(2):155–175
Hoffman K, Parejo M, Bessant J, Perren L (1998) Small firms, R&D, technology and innovation in the UK: a literature review. Technovation 18(1):39–55
Howells J (2006) Intermediation and the role of intermediaries in innovation. Res Pol 35(5):715–728
Huang KF, Yu CM (2011) The effect of competitive and non-competitive R&D collaboration on firm innovation. J Technol Trans 36:383–403
Kakabadse A, Kakabadse N (2002) Trends in outsourcing: contrasting USA and Europe. Eur Manage J 20(2):189–198
Kirbach M, Schmiedeberg C (2008) Innovation and export performance: adjustment and remaining differences in East and West German manufacturing. Econ Innov New Technol 17(5):435–457
Klein B, Crawford R, Alchian A (1978) Vertical integration, appropriable rents, and the competitive contracting process. J Law Econ 21(2):297–326
Knittel C, Stango V (2008) The productivity benefits of IT outsourcing. UC Davis working paper
Kogut B, Zander U (1992) Knowledge of the firm, combinative capabilities, and the replication of technology. Organ Sci 3(3):383–397
Kretschmer T, Miravete E, Pernías J (2012) Competitive pressure and the adoption of complementary technologies. American Economic Review, 102(4):1540–1570
Krugman P (1991) Increasing returns and economic geography. J Pol Econ 99(3):483–499
Kumar S, Snavely T (2004) Outsourcing and strategic alliances for product development: a case of banta digital group. Technovation 24(12):1001–1010
Lacity MC, Willcocks LP (2001) Global information technology outsourcing. Wiley, Chichester
Lacity MC, Willcocks LP, Feeny D (2009) Making the outsourcing decision. In: Willcocks LP, Lacity MC (eds) Information systems and outsourcing: studies in theory and practice. Palgrave Macmillan, New York, pp 212–234
Lehmann E, Neuberger D, Räthke S (2004) Lending to small and medium-sized firms: is there an east–west gap in Germany. Small Bus Econ 23:23–39
Lind J, Mehlum H (2010) With or without U? The appropriate rest for a U-shaped relationship. Oxf Bull Econ Stat 72(1):109–118
Loh L, Venkatraman N (1992) Determinants of information technology outsourcing: a cross-sectional analysis. J Manage Inf Syst 9(1):7–24
Miozzo M, Grimshaw D (2005) Modularity and innovation in knowledge-intensive business services: IT outsourcing in Germany and the UK. Res Pol 34(9):1419–1439
Mowery D, Rosenberg N (1979) The Influence of market demand upon innovation: a critical review of some recent empirical studies. Res Pol 8(2):102–153
Muller E, Doloreux D (2009) What we should know about knowledge-intensive business services. Technol Soc 31(1):64–72
Muller E, Zenker A (2001) Business services as actors of knowledge transformation: the role of KIBS in regional and national innovation systems. Res Pol 30(9):1501–1516
Nonaka I, Takeuchi H (1995) The knowledge-creating company: how Japanese companies create the dynamics of innovation. Oxford University Press, Oxford
Ohnemus J (2007) Does IT-outsourcing increase firm success? An empirical assessment using firm-level-data. ZEW discussion paper 07–087
Overby S (2007) What does it take to get IT outsourcers to innovate. CIO Magazine. http://tinyurl.com/overby07
Overby S (2010) IT outsourcing: 3 reasons your vendor won’t innovate. Networkworld. http://tinyurl.com/overby10
Peters B (2009) Persistence of innovation: stylised facts and panel data evidence. J Technol Trans 34:226–243
Peukert C (2011) Switching costs and information technology: the case of IT outsourcing. LMU Munich working paper SSRN ID:1683270
Piga C, Vivarelli M (2004) Internal and external R&D: a sample selection approach. Oxf Bull Econ Stat 66(4):457–482
Rouse AC (2009) Is there an information technology outsourcing paradox? In: Hirschheim R, Heinzl A, Dibbern J (eds) Information systems outsourcing: enduring themes, global challenges, and process opportunities, 3rd edn. Springer, New York, pp 129–146
Scarbrough H (1998) The external acquisition of information systems knowledge. In: Willcocks LP, Lacity MC (eds) Strategic sourcing of information systems. Wiley, Chichester, pp 137–161
Şener F, Zhao L (2009) Globalization, R&D and the iPod cycle. J Int Econ 77(1):101–108
Smolny W (2012) Cyclical adjustment, capital-labor substitution and total factor productivity convergence–East Germany after unification. Jahrbücher für Nationalökonomie und Statistik Journal of Economics and Statistics-Jahrbücher für Nationalökonomie und Statistik 232(4): 445–459
Tether BS, Tajar A (2008) Beyond industry-university links: sourcing knowledge for innovation from consultants, private research organizations and the public science base. Res Pol 37(6–7):1079–1095
TPI (2011) The TPI index – global outsourcing market data and insights, Second quarter 2011. 20 July 2011
Weeks MR, Feeny D (2008) Outsourcing: from cost management to innovations and business value. Calif Manage Rev 50(4):127–146
Weigelt C, Sarkar M (2009) Learning from supply-side agents: the impact of technology solution providers’ experiential diversity on clients’ innovation adoption. Acad Manage J 52(1):37–60
Whitten D, Wakefield R (2006) Measuring switching costs in IT outsourcing services. J Strat Inf Syst 15(3):219–248
Williamson OE (1975) Markets and hierarchies, analysis and antitrust implications. Free Press, New York
Williamson OE (1985) The economic institutions of capitalism. Free Press, New York
Williamson OE (1991) Comparative economic organization: the analysis of discrete structural alternatives. Adm Sci Q 36(2):269–296
Windrum P, Reinstaller A, Bull C (2009) The outsourcing productivity paradox: total outsourcing, organisational innovation, and long run productivity growth. J Evol Econ 19(2):197–229
World Trade Organization (2011) International trade statistics 2011. World Trade Organization, Geneva
Acknowledgements
I would like to thank Centre for European Economic Research, Mannheim, Germany (ZEW), for providing access to the data during my visits in 2009 and 2010. This chapter benefited from presentations at 4th International Conference on Industrial Dynamics, Innovation Policy, and Growth (Izmir 2010), 12th EUNIP Conference (Reus 2010), 9th ZEW Conference on the Economics of Information and Communication Technologies (Mannheim 2011), Technology Transfer Society Annual Conference (Augsburg 2011), INFORMS Annual Meeting (Charlotte 2011) and seminars held at ZEW Mannheim, Ulm University, LMU Munich, and IfW Kiel. I am particularly grateful to Werner Smolny, Tobias Kretschmer, Daniel Cerquera, Benjamin Engelstätter, Daniel Siepe, and Daniela Maccari-Peukert for their very helpful comments. Research assistance by Veronika Kneissl and Marvin Fleischmann is greatly acknowledged. All errors are mine.
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Appendix
Appendix
IT outsourcing in the EU15 countries in 2007. Percentage share of all enterprises with at least ten persons employed, grouped by sector where external suppliers performed (fully or partly) ICT functions requiring ICT specialists (IT outsourcing) during 2007. *Due to data restrictions without financial sector, data for the United Kingdom is not available (Source: Eurostat, information society statistics on enterprises 2007)
Accumulated knowledge as a function of the outsourcing level and specificity
Predicted probability of product innovation: γ = 0.3, γ = 0.6, and γ = 0.9 (A). Predicted probability of product innovation as a function of θ and 90% confidence interval, according to specification A without a squared term. All covariates fixed at the mean
Predicted probability of process innovation: γ = 0.3, γ = 0.6, and γ = 0.9 (A). Predicted probability of process innovation as a function of θ and 90% confidence interval, according to specification A without a squared term. All covariates fixed at the mean
Predicted probability of product innovation: γ = 0.3, γ = 0.6, and γ = 0.9 (B). Predicted probability of product innovation as a function of θ and 90% confidence interval, according to specification B with a squared term. All covariates fixed at the mean
Predicted probability of process innovation: γ = 0.3, γ = 0.6, and γ = 0.9 (B). Predicted probability of process innovation as a function of θ and 90% confidence interval, according to specification B with a squared term. All covariates fixed at the mean
Rights and permissions
Copyright information
© 2012 Springer Science+Business Media New York
About this chapter
Cite this chapter
Peukert, C. (2012). External Technology Supply and Client-Side Innovation. In: Audretsch, D., Lehmann, E., Link, A., Starnecker, A. (eds) Technology Transfer in a Global Economy. International Studies in Entrepreneurship, vol 28. Springer, Boston, MA. https://doi.org/10.1007/978-1-4614-6102-9_10
Download citation
DOI: https://doi.org/10.1007/978-1-4614-6102-9_10
Published:
Publisher Name: Springer, Boston, MA
Print ISBN: 978-1-4614-6101-2
Online ISBN: 978-1-4614-6102-9
eBook Packages: Business and EconomicsBusiness and Management (R0)