The Impact of Vertical Integration and Outsourcing on Firm Efficiency: Evidence from the Italian Machine Tool Industry.

In this paper we made use of an econometric approach to efficiency analysis in order to capture the role of vertical integration and outsourcing on firm's efficiency. Vertical integration is considered an indicator of structure, while outsourcing represents the process of its change. We consider inefficiency measures as indicators of organizational heterogeneity, related to the firm's choices regarding the phases of the production process that are under its control. We find support for the hypothesis of a relationship between vertical integration and efficiency. The results on outsourcing activity, and in particular the interaction between outsourcing and vertical structure, indicate that heterogeneous patterns, far from tending to cancel out each other as a consequence of common external changes, are reinforcing. Moreover, the sensitivity of inefficiency variance to the cycle, indicate that different firms may have different dynamic properties.