The causal effect of institutional quality on outsourcing

We empirically investigate the relationship between institutional quality and outsourcing to developing economies. To examine the within-country time trend, in contrast to previous cross-sectional studies, this article constructs a time-varying industry-based outsourcing proxy for 89 countries over 25 years (1980–2004). The resulting panel data allow us to identify the causal relationship by controlling for the fixed effects and dynamic factors. We find a significant positive effect of local institutional improvements on outsourcing within lower-middle income countries. In low, upper-middle and high income developing countries, institutional quality is not an important determinant of international outsourcing.