During past decades, services gained more and more importance as inputs into the production process of firms, not only in service sectors, but also in manufacturing industries. Additionally, firms nowadays increasingly rely on external service vendors (either based locally or abroad) which provide them with the requested services. This paper concentrates on business process outsourcing (BPO), i.e., the contracting of operations and responsibilities of a specific business (service) function (or process) to a third-party service provider. Specifically, the attempt of the paper is to evaluate the impact of business process outsourcing on the outsourcing firms. The reasons for firms to rely on external service providers are manifold. One main objective is to focus on the core activities. Firms therefore source out all (or at least parts) of their non-core activities which frees management capacity that can be deployed for a further development of the core business. Furthermore, external vendors employ specialised and qualified experts. Outsourcing brings this knowledge into the outsourcing firms. This can result in higher quality services and increased efficiencies. Last, because of economies of scale, external vendors are able to offer their services at lower costs compared to internally provided services. With this consideration in mind, the purpose of this paper is to find out whether or not BPO improves the productivity of the outsourcing firms. The analytical framework is based upon a Cobb-Douglas production function. For the empirical analysis, a comprehensive panel survey, conducted in the German manufacturing and service industries between 2000 and 2007 by the ZEW, is employed. In order to take account of unobserved firm heterogeneity, measurement errors in the variables and simultaneity of inputs and output, different estimation techniques are applied: a pooled OLS estimation, a fixed-effects vector decomposition approach, an Olley and Pakes approach and a System-GMM estimation. The results (over all estimation procedures) clearly show a positive and significant impact of BPO on firm-level productivity. According to the preferred System-GMM estimation results, the engagement in BPO has a positive effect of approximately 9 percent.


Business Process Outsourcing (BPO), Productivity, Panel Data, Olley-Pakes, System-GMM