Services Offshoring and its Impact on Productivity and Employment: Evidence from Germany, 1995–2006

Economists have recently recognised services offshoring as an important influence on domestic labour market outcomes. Services are of particular interest since their significance has grown in terms of both quantity and quality. Only one and a half decades ago, most services were considered non‐tradable, but the emergence and development of new information and communication technologies has made many services internationally tradable. The liberalisation of international trade in services trade has further accelerated the volume of services trade. Our econometric estimations focus on services offshoring by German manufacturing sectors. We use revised input–output data from 1995 to 2006. We first estimate the impact of services offshoring on labour productivity. We then measure the effects of services offshoring on labour demand. The results show that services offshoring increased sectoral labour productivity, but reduced German manufacturing employment. The overall results suggest that labour demand decreased over 1995–2006, because labour‐reducing productivity and substitution effects dominated labour‐augmenting scale effects from services offshoring.     

Offshore Outsourcing and Non‐production Workers: Firm‐level Relationships Disaggregated by Skills and Suppliers

In analysing the impact of offshoring on the skill composition, previous empirical studies have established that offshoring firms employ more non‐production workers. However, not all non‐production workers are highly skilled. This paper disaggregates non‐production workers into the following three categories: (i) skilled non‐production workers, (ii) unskilled non‐production workers and (iii) non‐production workers with special skills for offshoring and other overseas business management. By linking our offshoring survey data with firm‐level data for Japanese manufacturing firms, this paper finds that the share of skilled non‐production workers tends to be significantly high in offshoring firms but that of unskilled non‐production workers is not. As offshoring has expanded from production to non‐production tasks, this result implies that the distinction between skilled versus unskilled workers becomes critical among non‐production workers. Using our unique data on supplier types in offshoring, this paper finds that the share of non‐production workers for the management of overseas activities tends to be high in foreign direct investment firms and in firms outsourcing to foreign independent suppliers, but not in Japanese firms outsourcing to offshore suppliers located abroad but owned by other Japanese firms. This difference indicates that coordination burdens are likely to be at least partly mitigated by common languages or shared business practices. These findings suggest that offshoring has different impacts on employment depending on suppliers and the worker’s skill. The principal results are confirmed robust even after various firm characteristics are controlled for in panel regressions, though we should not give any causal interpretations.     

Offshoring,Plant Survival and Employment Growth

This paper empirically investigates the effects of offshoring on plant survival and employment growth using data on the Danish manufacturing plants during the period 1995–2006. To control for the potential endogeneity of the offshoring decision, the paper uses instrumental variables and propensity score‐matching approaches. The data allow me to control for the heterogeneity between the units by using firm‐level offshoring activities in different regions and performing the empirical analysis on plantlevel aggregation, which is shown to be of crucial importance. Using firm as a unit of observation, the effect of offshoring is, if any, very small. However, using plant as a unit of observation, there are strong indications that offshoring plays a much larger role for the extensive and intensive margin of adjustments. The results reveal that plants survival prospect is higher if the main offshoring is located in high‐wage countries; lower if it is located in low‐wage countries; and not affected if it is located in medium‐wage countries. Finally, the results also reveal that depending on where the main offshoring is located, the growth rate of low‐skilled employment is 2 to 8 per cent lower in plants of offshoring firms.     

The Trouble with Offshoring: Static and Dynamic Losses in the Presence of Unemployment

This study provides theoretical support for the popular objection to offshoring, whereby firms at home employ services of labour located abroad. In the presence of unemployment, our analysis highlights welfare losses from offshoring – not only for the static case of a fixed stock of capital, but also for the dynamic one of optimal saving and investment. We compare these static and dynamic losses to the gains that would instead arise under full‐employment conditions, assumed by most of the theoretical literature on offshoring. Our results suggest that public concerns over offshoring are justified when unemployment is taken explicitly into account.     

Crossing Industry Borders: German Manufacturers as Services Exporters

Manufacturing firms increasingly engage in service trade activities. Microlevel data show that German manufacturers accounted for nearly 30 billion euros of service exports in 2005. I have found that particular construction, engineering and R&D services are exported. The machinery industries, motor vehicles and chemicals producers dominate the overall pattern. The types of services exported vary strongly across industries. Service exports of advertising, data processing, management and R&D services are found to likely support foreign affiliates of firms. However, these headquarter services are only infrequently observable. Much more important are construction and engineering services exported by machinery firms. These might represent installation and maintenance services complementing exported machinery. R&D services exports generally represent the transfer of knowledge and technology, which is found to be particularly relevant for motor vehicle producers. Beyond the support of foreign production of firms, R&D services might be relevant also in R&D cooperations of firms or when firms have partnerships with foreign suppliers or buyers of intermediate products.     

Does host market regulation induce cross‐border environmental innovation?

This paper evaluates the effect of host‐country environmental policy stringency on the offshoring of green patents for 2000 top world R&D performers. It is shown that a more stringent environmental regulation triggers patent offshoring in the field of green technologies. Results are robust to various different specifications, to alternative definitions of innovation offshoring and of regulatory restrictions, to controls for firm and country‐level characteristics and to the consideration of possible endogeneity of regulation. We interpret these findings as evidence that MNEs can take advantage from their exposure to multiple institutional settings, reducing the costs of, and increasing the payoff from, green innovation offshoring. It is also suggested that R&D subsidies and non‐market‐based regulatory measures are more important than market‐based instruments as drivers of cross‐border environmental innovation.     

Quantile estimates of the impact of R&D intensity on firm performance

This paper investigates the relationship between initial research and development (R&D) intensity and firm growth using a unique data set for firms with R&D activities in Austria during the period 1995–2006. Results based on the least absolute deviation (LAD) estimator show that initial R&D intensity has a positive and significant impact on both employment and sales growth in the subsequent 2 years. Quantile regressions for each cross-section reveal that the impact of R&D intensity is significant from 0.3 to the highest quantile of the conditional distribution of employment growth. Furthermore, the elasticity of employment growth with respect to R&D intensity is highest for firms at or slightly below the median of the distribution of firm growth. Finally, we find that the impact of R&D decreases significantly over time.     

Multinational investment and host country development: Location efficiencies for services offshoring

Services offshoring has become an important source of investment and development in many emerging economies. While much attention has been paid to companies’ use of services offshoring to lower costs, not all of these offshoring activities have yielded the anticipated results. Thus, the choice of where to locate offshore facilities is an important yet complex one that has substantial implications for both the investing firm and host country. In this paper, we adopt the perspectives of service firms located in the U.S. and empirically examine the attractiveness of host countries for offshoring of services. Using data envelopment analysis (DEA), we examine which countries use their resources or inputs most efficiently in order to produce outputs that make them attractive for services offshoring. We find that China, India, Ireland, the Netherlands, Pakistan, Slovakia, Spain, and the U.K. are particularly attractive locations for services offshoring. All of these countries have at least one core efficiency-creating competency among the key inputs of wages, education, and infrastructure. We discuss implications for firms and government policy makers and offer recommendations for future research.     

Firm R&D,Absorptive Capacity and Learning by Exporting: Firm‐level Evidence from China

The absorptive capacity of firms developed through R&D promotes learning by exporting. In this paper, we estimate the instantaneous and long‐run productivity effects of exporting on the universe of Chinese manufacturing firms. We find that exporting has very different productivity effects for firms with different pre‐export R&D status. It has large and lasting productivity effects for firms with pre‐export R&D, while it has little effects for firms without pre‐export R&D. Furthermore, the effect of exporting increases with the number of years of pre‐export R&D investment.     

The Innovation Performance of Irish and Foreign‐owned Firms: The Roles of R&D and Networking

This paper contributes to the growing evidence that Irish and foreign‐owned firms based in Ireland conduct their innovation activities differently from each other. It tests the Cohen and Levinthal hypothesis, separately for Irish and foreign‐owned firms, that undertaking R&D and collaborating with external networks together enhance the probability of product and process innovation. To control for potential endogeneity of the external networking variables, a two‐step procedure is used with predicted probabilities used as instruments in the estimated production functions. Based on data from the Irish Community Innovation Survey 2006 to 2008, the results suggest that Irish‐owned firms which engage in external networks with public knowledge sources, while simultaneously undertaking R&D, are more likely to innovate than firms which perform these two activities individually. Irish‐owned firms which engage in backward networking for product and forward networking for process innovation while also undertaking R&D are less likely to be innovative, perhaps suggesting a substitution effect. These results for Irish‐owned firms provide some support for Cohen and Levinthal's hypothesis. However, foreign‐owned firms seem to behave differently, being largely self‐contained and relying exclusively on intramural R&D for innovation as the external networking variables, both individually and when interacted with R&D, have no effect on innovation likelihood.     

Offshoring and the Skill‐premium: Evidence from Individual Workers’ Data

During the 1980s the United States has experienced an increase in both international trade and the skill‐premium. The association between these two phenomena has proven elusive in the early empirical literature on the subject. Indeed, the consensus among labour economists seems to be that trade has not been the main cause of such increase in the skill‐premium. This view has been challenged by Feenstra and Hanson (1999, Quarterly Journal of Economics, 114, 3, 907) who find that offshoring sizably affects the skill‐premium. I revisit this debate using individual workers’ data from the March Current Population Survey combined with industry‐level trade data. This strategy improves upon the work of Feenstra and Hanson who do not control for the demographic characteristics of the labour force. In my results, offshoring can explain between 9 and 30 per cent of the increase in the college wage premium, relative to high‐school workers. In addition, I find that offshoring can explain 21 per cent of the increase in the relative employment of skilled labour. These results suggest that offshoring may play an important role in the increase in the relative demand of skilled workers.     

The Effects of Globalisation on the US Labour Mark'et: Service Sectors Considered

How has globalisation affected employment and wages in the United States? Existing studies largely ignore the intersector labour movement between the manufacturing and service sectors by focusing only on the intrasector movement within the manufacturing sector. However, by decomposing the aggregate labour demand in the United States, we find that the intersector movement is more substantial than intrasector movement. Motivated by the decomposition results, this study presents a three‐sector model that includes a manufacturing sector and two service sectors at varying skill intensities. The model shows that offshoring might translate into smaller‐than‐expected wage changes because of the intersector labour movement. In line with the theoretical predictions, two notable empirical results are presented. First, an occupation's exposure to offshoring has non‐significant, albeit negative, effects on wages. Second, the more an occupation is exposed to offshoring, the lower its employment in the manufacturing sector as a share of its total employment. Furthermore, these effects are larger for more routine occupations or those requiring less education.     

Technological capabilities and the decision to outsource/outsource offshore R&D services

We analyze firm and environmental factors influencing the decision to outsource and outsource offshore R&D services. To do so, we have adopted a co-evolutionary approach adapted to firm internationalization, according to which these decisions are conditioned by the institutional environment (the IPR system), managerial intentionality (firms’ international strategy) and organizational path dependence and learning (firms’ technological and governance capabilities). Specifically, we argue that: (1) firms with more technological capabilities will tend to both outsource and outsource offshore R&D services, (2) the positive effect of technological capabilities would be leveraged when the institutional context of the firms’ country of origin has allowed them to transform their technological expertise into governance capabilities, and (3) that those firms with a higher local responsiveness attitude will be more likely to outsource offshore R&D services. We have found support for our hypotheses using survey data from a sample of 182 technology intensive firms from the European Union and the US.     

Technical Progress and Labour Demand in Swedish Manufacturing Firms

Controlling firms’ sales in the labour demand model, this paper investigates effects of trade and R&D via technical progress on labour demand in a dynamic framework, based on a panel of Swedish manufacturing firms for 1990s. The main results of this study indicate that employment elasticities with respect to different characteristics of firms (wages, total sales, exports and R&D efforts) and industrial import penetration could vary across respective skilled sectors. There is some indication to that import penetration from fourteen ‘old members’ of European Union could induce capital-saving technical progress and result in the rise in demand for labour for firms in medium-low skilled sector, whilst those from the ten ‘new members’ of European Union could induce x-efficiency and labour-saving technical progress for firms in low-skilled sector. Furthermore, the effects of R&D intensity on demand for labour are positive and significant for firms in medium-high-skilled and high-skilled sectors.

R&D Productivity and the Spillover Effects of High‐tech Industry on the Traditional Manufacturing Sector: The Case of Taiwan

This study sets out to estimate the impact of R&D on productivity within the private sector, with further analysis of the different impacts of R&D within high‐tech and traditional manufacturing firms. We also attempt to examine the spillover effects from R&D investment in the high‐tech sector on productivity growth within the traditional industries. Using a sample of 136 large manufacturing firms during the period 1994–2000, we develop an extended version of the Cobb‐Douglas production function model, and our findings suggest that Taiwan's R&D investment had a significant impact on firm productivity growth, with output elasticity standing at around 0.18. When the sample is divided into high‐tech and traditional firms, the R&D output elasticity in high‐tech firms is significantly greater than that found in traditional firms. In addition, the average rate of return in high‐tech firms is much greater than that estimated for other industries. Besides, our empirical results show that, although significant, the impact of R&D investment from the high‐tech sector, on the productivity growth of traditional firms, is rather limited.     

How Do Ownership Concentration and Family Control Affect R&D Investments? New Evidence from Taiwan

This study finds a nonlinear relationship between ownership concentration and R&D investments. Specifically, ownership concentration is positively related to R&D investments at a low level of ownership concentration; the relationship becomes negative when ownership concentration is at a high level. However, the impact of ownership concentration on R&D investments is lessened in family‐controlled firms; that is, family control moderates the relationship between ownership concentration and R&D investments. Overall, this study suggests that the ownership concentration's nonlinear impact on R&D investments differs between family‐controlled firms and nonfamily‐controlled firms.     

Volatility due to offshoring: Theory and evidence

Existing models of offshoring are not equipped to explain how global production sharing affects the volatility of economic activity. This paper develops a trade model that can account for why offshoring industries in low wage countries such as Mexico experience fluctuations in employment that are twice as large as in high wage countries such as the United States. We argue that a key to explaining this outcome is that the extensive margin of offshoring responds endogenously to shocks in demand and transmits those shocks across borders in an amplified manner. Empirical evidence supports the claim that the extensive margin of offshoring is an active margin of adjustment, and quantitative simulation experiments show that the degree of movement of this margin in the data is sufficient to explain relative employment volatility in Mexico and the U.S.     

Embracing realism and recognizing choice in IT offshoring initiatives

As more and more firms move activities offshore to countries that are distantly located from their home base of operations, the initial advantages of making this move are increasingly tempered by realities on the ground. For firms contemplating offshoring today, it is important to weigh the advantages and disadvantages of undertaking or extending this strategy in light of what we now know. Broadly speaking, successful offshoring must begin with an understanding of the market and competitive pressures that encourage offshoring, and then build on recognition of how these pressures can be addressed using or modifying the offshoring options currently practiced. Our discussion of these issues is based on analysis of offshoring of IT-enabled services by Fortune Global 500 firms in such areas as software development and business processes that support customer interaction.     

Volatility due to offshoring: Theory and evidence

Existing models of offshoring are not equipped to explain how global production sharing affects the volatility of economic activity. This paper develops a trade model that can account for why offshoring industries in low wage countries such as Mexico experience fluctuations in employment that are twice as large as in high wage countries such as the United States. We argue that a key to explaining this outcome is that the extensive margin of offshoring responds endogenously to shocks in demand and transmits those shocks across borders in an amplified manner. Empirical evidence supports the claim that the extensive margin of offshoring is an active margin of adjustment, and quantitative simulation experiments show that the degree of movement of this margin in the data is sufficient to explain relative employment volatility in Mexico and the U.S.