Abstract
We analyse the relationship between international sourcing, measured as imports of intermediate inputs, and the technical efficiency of firms in the information and communications technologies (ICT) manufacturing industry in Sweden. Using stochastic frontier analysis, we provide evidence that global sourcing improves firms’ capabilities to combine and re-combine inputs in productive ways, thereby increasing technical efficiency. We find a robust relationship between technical efficiency and international outsourcing. First, we find that firms that are deeply integrated into global sourcing networks are closer to their own production frontier. Second, firms that are engaged in international sourcing are also closer to the industry efficiency frontier. These findings are consistent with the argument that international sourcing stimulates firms’ capabilities by enabling them to identify and adopt higher quality inputs or more efficient production and management practices. These findings also suggest that the variety and extent of firms’ global sourcing networks constitute an important source of differences in efficiency levels among firms the ICT manufacturing industry.
Highlights
International outsourcing has grown considerably in importance in recent decades
We find a positive relationship between global sourcing and technical efficiency for firms in Swedish information and communications technology (ICT) manufacturing
These results are in line with the idea that firms who import a wider variety of inputs may be more flexible in the way their production is organized
Summary
International outsourcing has grown considerably in importance in recent decades. Falling trade and transportation costs in addition to advances in information and communications technology (ICT) enable firms to source production inputs globally and exploit global differences in comparative advantage across production stages. The idea is that global sourcing may increase the modularity of firms’ production systems, which, in turn, increases flexibility and enable combination of inputs in new ways This enhances the returns, and incentives, to develop and strengthen recombinant capabilities. Within industries, there tends to be a high degree of variation in firm performance, as not all firms achieve the maximum level of output attainable (Kumbhakar, Lovell 2000) Sources of such efficiency heterogeneity include differences in the way firms organize and manage their production, as well as differences in terms of firms’ ability to match characteristics of their inputs to their needs. This finding is consistent with the hypothesis that global sourcing improves firm-level technical efficiency, and puts firms in a better position to improve their capabilities
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