A novel measure of firm-level production outsourcing

Abstract

Outsourcing is a critical area of study, as related decisions account for many of the structural changes in supply chains. However, research of the causes and impacts of outsourcing has been constrained by limited measures of outsourcing intensity. Most outsourcing studies are operationalized at an industry level, or rely on data from surveys of small samples that focus on specific outsourced functions and processes. This paper proposes an industry-relative measure of firm-level production outsourcing that is easy to estimate using readily available financial reporting data. We utilize a stochastic production function to estimate the amount of each firm's output that is unaccounted for by their use of capital and labor and partition this residual into firm-specific productivity and outsourcing. Our analysis indicates that the proposed measure is valid and substantially more predictive of actual production outsourcing levels than other measures offered in the literature. This measure promises to better enable researchers to more accurately assess firm-level production outsourcing, as well as aiding their investigations into the many outsourcing antecedents, performance outcomes, and contingency effects proposed in the literature.