International Services Outsourcing and Innovation: An Empirical Investigation

We provide a comprehensive empirical analysis of the links between international services outsourcing, wages and innovation using plant level data covering the period 2000 to 2004. Somewhat consistent with the predictions of recent theory, we observe a positive relationship between international outsourcing of services and innovative activity, measured in terms of R&D, at the plant level. However, we only find evidence for such positive effects for plants in manufacturing, not in services sectors. Furthermore, this positive effect of international services outsourcing on innovation does not appear to be mediated through wages as proposed by theory.