Corporate Governance, Organization and the Firm

Corporate Governance, Organization and the Firm

Co-operation and Outsourcing in the Global Economy

New Perspectives on the Modern Corporation series

Edited by Mario Morroni

In recent years, applied studies have shown widespread, profound and increasing heterogeneity across firms in terms of their strategy, organization arrangement and performance. This book investigates the diversity of business firms, offering a picture of the different organizational settings they adopt in their endeavour to cope with increasing competitive pressure.

Chapter 7: Short-term Gain, Long-term Pain? Implications of Outsourcing for Organizational Innovation and Productivity

Andreas Reinstaller and Paul Windrum

Subjects: business and management, corporate governance, economics and finance, corporate governance, industrial organisation


Andreas Reinstaller and Paul Windrum INTRODUCTION 7.1 This chapter examines the relationship between new internet-based ICTs, organizational innovation and outsourcing. We consider the range of routines that are being outsourced, and discuss the latest empirical findings regarding the potential benefits and costs of outsourcing activities. These suggest that outsourcing may have advantages in the short run but have negative long-run implications for competitive performance. We argue that a key issue is the impact of outsourcing on a firm’s capacity to engage in organizational innovation. In order to examine this issue, we develop a model of organizational innovation. In this model, the goal of managers is to identify an organizational architecture that more effectively integrates all the administrative routines and productive activities of the firm. As part of the process of innovation, managers can choose to carry out an activity in-house or to outsource that activity. Key factors influencing this decision are the relative information costs of organizing activities internally, and the information costs associated with setting up and maintaining interfaces with external suppliers. Herein lies the importance of new ICT. The introduction of new ICTs can alter the relative costs of internal and external administration. This captures an important stylized fact about knowledge-intensive business services (KIBS), such as business consultants, financial services and ICT services: the rapid expansion of KIBS over the last decade is strongly connected with the introduction and diffusion of internet-based networking ICTs. The chapter is organized as follows. Section 2 reviews recent...

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