Outsourcing involves firms’ choosing to procure goods
or services from other firms rather than producing them
internally. For example, firms can outsource accounting
and other business services to service providers
or maintain internal departments to meet these needs.
An automobile manufacturer can design and produce
parts internally or outsource by relying on suppliers
for production, design, manufacturing, or some combination
of these activities. The choices that firms make
regarding outsourcing have increasingly attracted the
attention of the media, policymakers, and researchers.
This attention stems in part from the fact that outsourcing
has become increasingly global in scope, meaning
that firms that outsource are often moving production
and jobs across international borders. In addition, a
growing number of researchers in recent years have
identified outsourcing as a key determinant of firm
profitability and, therefore, a key component of business
strategy. Competitive pressure continually drives
firms toward more efficient production. Because outsourcing
helps firms to achieve this goal, understanding
the drivers of outsourcing improves our understanding
of business strategy.