To analyze the role of knowledge, w

To analyze the role of knowledge, we build a firm-level production function that includes a measure of service providers’ IT knowledge. We estimate the production function using data on IT outsourcing arrangements and assess both the overall returns and the impact of IT knowledge. Finally, we examine the heterogeneity in the magnitude of economic gains accruing from IT outsourcing by considering the role of firm-specific factors, including IT intensity and the types of services outsourced.