Outsourcing, Offshoring Outsourcing, Offshoring and Adjustment in the and Adjustment in the

Global EconomyGlobal Economy

Presentation prepared for Munich Economic Summit, 4 May 2006

John Whalley(University of Western Ontario, CESifo &

NBER)

4 May 2006 5th Munich Economic Summit

OutsourcingOutsourcing

Purchase of goods and services that were previously produced inside a company.

Company producing the goods and services can be located in the same country (domestic outsourcing) or outside the country of the purchasing company (international outsourcing).

4 May 2006 5th Munich Economic Summit

OffshoringOffshoring Purchase of goods and services

previously produced while inside the purchasing company from companies in locations outside the country.

Covers not only international outsourcing, but also international insourcing with foreign affiliates of domestic parent companies exporting to their parents.

4 May 2006 5th Munich Economic Summit

Outsourcing in Research Outsourcing in Research LiteratureLiterature

Grossman – Helpman (2002) Outsourcing implies more than purchase of raw

materials and standardized intermediate inputs. It involves vertical disintegration of production with relationship-specific partners.

Outsourcing... “means finding a partner with which a firm can establish a bilateral relationship and having the partner undertake relationship specific investments so that it becomes able to produce goods and services that fit the firm’s particular needs”

Bhagwati, Panagariya, Srinivasan (2004) Outsourcing of services, including professional

services. Outsourcing equated with long distance purchases of services by electronic media, such as phone and fax.

4 May 2006 5th Munich Economic Summit

Measuring OutsourcingMeasuring Outsourcing Abraham & Taylor (1996) document increase in

outsourcing of business services in 13 US industries.

Camper and Goldberg (1997) measure outsourcing of intermediate inputs for various industries in Canada, Japan, the UK, the US and except Japan show a doubling in the share of imported inputs between 1975 and 1996.

Feenstra (1998) measures all imported components used in production by US firms and computes various measures of outsourcing arguing all have increased since the 1970s.

Tomiura (2005) reports relatively few Japanese firms outsource across national boundaries.

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Impacts of OutsourcingImpacts of Outsourcing Direct wage effects / employment effects in OECD as

production moves offshore. Indirect effects on bargaining power of unions in OECD

from prospect of outsourcing. Feenstra / Hanson (1996, 1997) find outsourcing increases

wage of skilled versus unskilled labour in both US & Mexico.

Feenstra / Hanson (1999) find US outsourcing raises real wage of US non production workers by 0.16% / year and also real wage of US production workers (slightly) by 0.01% / year.

Dreher and Gaston (2005) report results indicating various measures of globalization are negatively correlated with both union bargaining power and union membership

Amiti / Wei (2006) find between 1992 and 2000 service outsourcing (technical support, medical claims processing, software development) account for around 11% of US manufacturing productivity growth, compared to a 3-6% gain from imported material inputs.

4 May 2006 5th Munich Economic Summit

Outsourcing to China, Channels of Outsourcing to China, Channels of Economic Integration, and Adjustment Economic Integration, and Adjustment PressuresPressures

Adjustment pressures stem not only from component sales, but also final stage transactions involving OECD retailers. A variety of channels for such transactions exist.

Resourcing of component and final stage suppliers across national borders.

Insourcing – Chinese companies buying OECD firms; keeping distribution system in OECD & moving production back to China.

Throughsourcing – Trade related transactions orchestrated and conducted via middlemen in Hong Kong (plus Korea, Taiwan)

Roundaboutsourcing – preferential tax and other policies towards foreign invested enterprises generate outflows from China to be returned to trade oriented enterprises.

4 May 2006 5th Munich Economic Summit

OECD adjustments and OECD adjustments and OutsourcingOutsourcing

Current adjustments and potential future adjustments.

Size of low wage labour pool in China / India / Indonesia

FIEs in China now account for 60% of exports but only 3% of employment.

China’s exports growing at 35-40% / year Cumulative OECD FDI into China ≈US$500

bill. In OECD GDP ≈ $25 trillion. If K/Y ratio is 3,

OECD capital stock ≈ $75 trillion. Adjustments in OECD from outsourcing may

be only in their infancy?