The paper investigates the diversified patterns of outsourcing in the Lombardy region and relates them to the probability of introducing product and process innovation. Based on a large firm-level survey, we show that outsourcing processes are strongly regionally embedded and that offshoring is still a limited phenomenon. Outsourcing strategies are shown to be positively related to firms’ innovation. In particular, the outsourcing of service activities is mostly related to product innovation, thus suggesting that firms successfully pursue core strengthening strategies. Our econometric estimates show that both geographical and organisational proximity matter. Indeed, the positive association of services with innovation is strongly related to their regional dimension, which points towards the importance of local user–producer relationships. When outsourcing crosses national borders, keeping the outsourced activities within extended organisational boundaries (i.e. within the group or network of affiliates) appears relevant, particularly with reference to R&D activities.
Outsourcing represents a defining character of the contemporary economic dynamics. Fragmentation and re-organisation of business activities across functions and space have been significantly accelerating over the last couple of decades, driving structural change at firm, industry and country level. Instead of continually growing in size and scope, the modern “corporate model” has been leaning towards network-based typologies, with an ever more diversified range of activities and functions being the object of outsourcing decisions. Outsourcing strategies no longer concern only fairly specialised repetitive tasks, but spread to a wide range of activities, including sensitive functions and knowledge-intensive tasks, such as design and R&D (Howells, 1999 and Leiblein et al., 2002). The phenomenon has implied widespread leverage of technology and knowledge from external sources, in the attempt to flexibly respond to the pressures and challenges of competition.
The functional breadth of the outsourcing phenomenon is but one dimension of a complex emerging trend. The spatial distribution of outsourced activities, and the resulting geographical span of production networks, contribute to shaping global and local value chains, which affect, beside firms organisation and performance, the insertion of regions and countries in the international division of labour (Grossman and Helpman, 2002 and Gereffi and Sturgeon, 2004).
Outsourcing has been extensively investigated in the economic and the management literature, however very few empirical studies have explored the relationship between outsourcing and firms’ innovative performance. This paper contributes to the existing literature by assessing the geographical and functional dimensions of outsourcing and their relationship to the innovation output of firms located in a mature industrial system, the Lombardy region. Although conclusions should not be stretched to the general case of outsourcing, Lombardy represents an interesting case in itself, for its leading role in the Italian economy, its exposure to international competitiveness and global trends, the pervasive tertiarisation process, that are common across advanced regions, and, still, the relevance of a highly diversified manufacturing core. As such, the case of Lombardy adds to the sparse firm-level studies using large datasets to analyse the impact of international fragmentation on the performance of firms (e.g. Tomiura, 2005) and offers insights on the evolutionary trends that are currently affecting European traditional industrial regions at large.
Furthermore, we consider a specific typology of outsourcing, among the many discussed in the literature: the contracting out of activities that were previously carried out inside the firm, that is, a deliberate change in the firm boundaries, rather than a generic “make or buy” strategy.
Overall, results indicate that outsourcing is a very pervasive phenomenon encompassing to a similar extent all firms and industries. However, not all activities within the firm are equally subject to outsourcing. Ancillary services, such as logistics, IT services, maintenance of machines, are the activities most often subject to outsourcing, followed by production and assembly activities and, to a less extent, by R&D ones.
