External Technology Supply and Client-Side Innovation

Abstract

Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW.Download this ZEW Discussion Paper from our ftp server:http://ftp.zew.de/pub/zew-docs/dp/dp11082.pdf Non-Technical SummaryDynamic market environments and consumer preferences demand firms to assure a high degree of flexibility. At the same time, competitive pressure from globalized markets leads to constantly raising efficiency requirements. Organizations change their design from static to dynamic concepts in order to react adequately to these developments and challenges. A common strategy is to reach beyond the boundaries of the firm to access critical resources.Accordingly, we observe that technology transfer from providers of knowledge intensive business services attracts more and more attention.A specific case is the external supply of information technology. A major reason why firms outsource IT, is the potential to cut cost. We argue that there is also a potential of knowledge transfer in IT outsourcing relationships, leading to client-side innovation. The aim of this paper is to contribute to resolving an empirical puzzle arising from the prior literature. Some authors find beneficial effects of IT outsourcing, others underline that firms often fail to achieve their expected strategic goals.Our stylized theoretical model combines a knowledge production function framework and transaction cost economics. We hypothesize that the right balance between internal and external knowledge is critical for innovation. The empirical application is German AbstractFlexibility in response to competitive pressure from globalized markets and increasingly individualized customer desires has become vital for firms. A common strategy to address this challenge is to employ a dynamic concept of organization and reach beyond the boundaries of the firm. Accordingly, technology transfer from providers of knowledge intensive business services attracts more and more attention. In this context we focus on external supply of information technology and client-side innovation. The aim of this paper is to contribute to resolving an empirical puzzle arising from the prior literature. Some authors find beneficial effects of IT outsourcing, others underline that firms often fail to achieve expected strategic goals. Our stylized theoretical model combines a knowledge production function framework and transaction cost economics. We hypothesize that the right balance between internal and external knowledge is critical for innovation. The empirical application is German firm-level data covering...