Our study makes several contributions. First, by focusing on
productivity impacts, we are able to develop a better understanding
of the economic value of IT outsourcing and the key
role of IT knowledge.
Specifically, our results improve our
understanding of why firms outsource and whether and how
outsourced IT services can enhance the productivity of client
firms. We show that the returns to IT investment result not
just from reductions in the prices of IT capital, but also from
the reorganization of production.
Moreover, to the extent that
the IT knowledge held by a vendor reflects economies of
specialization, we argue that these economies are an essential
factor in achieving the benefits of IT outsourcing. Methodologically,
we introduce a selection equation to reflect the
outsourcing decision process, which allows us to estimate the
productivity effects of IT knowledge while controlling for
potential endogeneity arising from self-selection, resulting in
more robust findings.