IT Outsourcing and Employment Growth at the Firm Level

In the short run, outsourcing is usually associated with the resulting job losses in the contract granting firm, since in-house staff is generally laid-off or transferred to the outsourcing provider. However, the medium and long run effects of outsourcing on employment growth might still be positive. As recent research has revealed, outsourcing can lead to substantial improvements in firm performance which may in turn result in competitive advantages for these firms. A stronger market position boosts additional demand for the products and services offered by outsourcing firms which thereby eventually enables them to raise employment in order to satisfy this positive demand shift. This paper analyses the outsourcing of information technologies (IT) and its effect on medium-term subsequent firm-level employment growth in Germany. IT outsourcing is a special case of outsourcing and it can be seen as the practice of turning over all or at least parts of an organisation’s IT functions to an outside vendor. Recently assembled representative results for Germany indicate that more than 78 percent of firms with five or more employees are involved in IT outsourcing. During the last decade, the latter has beyond doubt become an integral part of corporate strategy for German firms. The data stems from the ZEW ICT surveys conducted in 2004 and 2007 in the German manufacturing and selected service industries. More than 1 100 observations are available for the empirical analysis. Firm growth refers to the period from 2003 to 2006 and is based on the (firm-level) employment figures measured for both time periods. IT outsourcing describes whether the firm has outsourced at least one of the following three basic IT services to an external service provider: installation of hard- and software, computer system maintenance, user assistance and support. Due to the fact that IT outsourcing firms may also be the ones that are more successful in general, for instance due to unobservable firm characteristics such as managerial abilities, this study takes account of endogeneity by employing a two stage instrumental variable approach. The study finds evidence that IT outsourcing has a positive effect on firms' employment growth rate. Dividing the sample into manufacturing and service firms, however, a mediumterm positive growth effect of IT outsourcing can only be observed for firms operating in the service sector.

Ohnemus, Jörg (2010), IT Outsourcing and Employment Growth at the Firm Level, ZEW Discussion Paper No. 10-108, Mannheim.