As an emerging employment arrangement, labor outsourcing has profoundly affected the production and operation activities of firms due to its flexibility and cost advantages. Using a sample of China’s A-share listed firms from 2012 to 2023, this paper empirically examines the impact and mechanisms of labor outsourcing on corporate product market performance. The results show that labor outsourcing significantly improves corporate product market performance. Mechanism testing indicates that this effect operates primarily through increasing the proportion of R&D personnel, raising R&D investment, and enhancing R&D innovation efficiency. Heterogeneity analysis further reveals that the promotion effect is more pronounced for high-tech firms, manufacturing firms, and asset-light firms. This paper not only provides theoretical support and practical guidance for firms to achieve cost reduction and efficiency improvement and optimize resource allocation efficiency, but also offers useful insights for government authorities to improve institutions related to labor outsourcing and promote the high-quality development of the real economy.