Does services offshoring boost productivity? Some Canadian evidence on causation

The quest to enhance productivity makes outsourcing not only an important corporate strategy, but a focus of public policy as well. Existing studies consider correlations between outsourcing and productivity. This paper attempts to examine causation. We use annual time series data for Canada on international outsourcing of services, and total factor productivity for the period 1961--2005 for three sectors: manufacturing; business services; and all other (non-business) services. The statistical results strongly suggest that services offshoring increases productivity growth for business services and manufacturing, with some remarkable differences in the direction of causality across sectors. This has implications for how trade liberalisation, for example, can be expected to affect the contribution of services to national productivity growth.