2208 . doc International Services Outsourcing , Wages and Innovation

Theories of international outsourcing predict rises in firms’ innovation rates mediated through lower wages per worker. Consistent with the predictions of Glass and Saggi (2001), we find a tradeoff between wages and innovation. However, we do not find that the proportion of internationally outsourced service inputs reduces but rather increases a firm’s wage per worker, a result most likely driven by increased specialisation and upskilling. The direct effect of international services outsourcing on innovation (as opposed to the indirect effect as mediated through wages) is positive. We conclude that the positive effect of international services outsourcing on innovation is not mediated through wages but more likely to result from cost savings or even increased scope for specialisation. JEL classification: