What Happened to Foreign Outsourcing when Firms Went Online?

It was widely expected that improvements in online payments, more user-friendly browsing and purchasing tools would increase outsourcedservice volumes (UNCTAD, 2004; Bhagwati et al., 2004) though the effectfor materials is largely dismissed.

Using a unique dataset for 99 firms who started outsourcing online in 2003and applying propensity-score matching with a control group of over 682firms not outsourcing online, we find that circa 50 percent of the growthin foreign services outsourcing is due to online outsourcing. The effectfor foreign materials outsourcing is insignificant. Our results aresupported by a simple model describing differences in transportation costsand quality transparency for materials and services.