Production outsourcing, organizational governance, and firm's technological performance: evidence from Italy

Aim of this paper is to study whether and how the firm's decision to outsource production activities affects its technological performance. In particular, we look at how the alignment between the firm's gover¬nance strategy and the underlying attributes of the transactions affects the capacity of the firm to introduce new products and processes. Using microeconomic data on a panel of Italian manufacturing firms for the period 1998-2003; we develop a two-stage approach: first, we estimate the determinants of the firm's organizational governance (production outsourcing); second, we incorporate a measure of governance mis¬alignment into a technological performance relation. We find (i) that firms not aligned with the optimal organizational governance perform less well in terms of process innovation than more aligned competitors, but (ii) that misalignment has a positive effect on product innova¬tion. However, this counterintuitive result is strongly characterized by non-linear effects that reverse the latter correlation for high values of governance misfit.