Does Outsourcing Increase Profitability?*

I INTRODUCTION

Both the popular press and academic literature have recently covered the growth of outsourcing or contracting out, of business activities and its economic implications. While Heshmati (2003) in his recent survey points out that there is no general definition or measurement of outsourcing, he broadly describes it as ...different kinds of corporate action related to all subcontracting relationships between firms and the hiring of workers in nontraditional jobs (p. 99). Outsourcing may provide a viable strategy if firms aim to save on labour costs (Abraham and Taylor, 1996), exploit production differentials both within the services sector and between services and manufacturing (Fixier and Siegel, 1999), or take advantage of globalisation (Feenstra and Hanson, 1999). According to an article in the Financial Times, Subcontracting as many non-core activities as possible is a central element of the new economy.1