deutschebank research devisionoflabor table 6

Recent research has, however, found a supposedly negative correlation between the degree of division of labour (in the form of outsourcing, for example) and productivity at the company level, meaning that more outsourcing allegedly hurt productivity. This would fundamentally contradict standard manage- ment practices. In our opinion, this supposed contradiction is based on a misleading interpretation of empirical findings which overlooks important effects.
Performing a dynamic analysis reverses the picture: a vertical integration that was 1 percentage point lower in 2003 is statistically associated with 5-10 percentage points higher earnings growth (cumulative) in the following four years. Disintegrated production thus delivers a competitive edge. The decisive factor, of course, is the optimum degree of vertical integration for each individual company, which can be derived for example from the firm’s level of specialisation, the sector in which it operates, its market position and management capacities.

Outsourcing and offshoring are highly discussed management practices since the dawn of the new millennium. This form of di- vision of labour promises major efficiency benefits be- cause companies can concen- trate on their core competen- cies and get help with their weaknesses from suppliers and business partners.

Economic research has accord- ingly been largely positive in its assessment of the trend towards outsourcing and offshoring. This view is supported by extensive literature stretching back to the founding fathers Adam Smith (1776) and David Ricardo (1817).

With outsourcing it is also a mat- ter of the right degree, striking the right balance between spe- cialisation benefits on the one hand and transaction costs on the other. The maximum pos- sible degree of outsourcing is usually not efficient.

 

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