The effects of in-house manufacturing and outsourcing on companies' profits and productivity

This paper provides novel empirical evidence that the establishment and development of in-house value-adding activities pays off for manufacturing companies in several economic respects. In contrast to common belief and management practices, extensive out-sourcing of manufacturing activities has a strong negative impact on a firm's profit and total factor productivity (TFP). Mere cost-efficiency comparisons seem to be insufficient for appropriate make or buy decisions. Neglected factors like sub-par product variant and delivery flexibility capabilities of far-shore suppliers or internally disturbed competence formation and value creation processes are in many cases overcompensating the supposed cost benefits of outsourcing.