The Extent and Impact of Outsourcing: Evidence from Germany

By Aubuchon, Craig; Bandyopadhyay, Subhayu et al. | Federal Reserve Bank of St. Louis Review, July-August 2012 | Go to article overview

The Extent and Impact of Outsourcing: Evidence from Germany


Aubuchon, Craig, Bandyopadhyay, Subhayu, Bhaumik, Sumon Kumar, Federal Reserve Bank of St. Louis Review


The authors use data from several sources, including plant-level data from the manufacturing sector in Germany, to expand the literature on outsourcing. They find that, in Germany, the extent of outsourcing among manufacturing industries is higher than among service industries and that the outsourcing intensity of these industries did not change much between 1995 and 2005. They also find a statistically significantly positive impact of industry-level outsourcing intensity on German plant-level labor productivity for both 2000 and 2005. The estimated economic impact of outsourcing on plant-level productivity is also fairly significant. (JEL Fl6, D24)

Federal Reserve Bank of St. Louis Review, July/August 2012, 94(4), pp. 287-304.

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This paper incorporates plant-level data from the manufacturing sector in Germany to expand the literature on the impact of outsourcing on firm-level productivity. The 2009 Capgemini Executive Outsourcing Survey (Wilmot, 2009) indicates that nearly three-fourths of the (surveyed) executives believe that outsourcing enables firms to survive in today's global economy. They argue that outsourcing makes firms agile and flexible (60 percent), thereby making them better capable of facing competition, and that the money saved from outsourcing can facilitate growth (70 percent). However, in an era of high unemployment, criticism of outsourcing in the developed world is on the rise; and such criticism has found some support from academic research. Keuschnigg and Ribi (2009) demonstrated that outsourcing increases both unemployment and the labor income risk of unskilled workers in the home country. In addition, Zhang (2011) argued that even if outsourcing increases employment in the aggregate, it may cause net welfare loss through resource misallocation. Such findings have resulted in a wide range of propositions to reduce outsourcing, either by disincentivizing it by using an appropriate tax policy or by directly imposing a cap on the proportion of jobs that can be sent abroad to offshore firms.

The economic and political concerns about unemployment and income fragility must be balanced against the need to ensure productivity growth. The deep post-2008 financial and economic crisis may have permanently reduced the production capacity of industrialized countries by as much as 4 percent (Directorate-General for Economic and Financial Affairs, 2009, and Furceri and Mourougane, 2009), such that a rapid rise in productivity growth might be the only way to ensure that income levels in these economies recover to a pre-crisis level in the foreseeable future (Bhaumik, 2011). At its heart, outsourcing involves firms specializing in activities in which they have core competence (or comparative advantage) and interfirm trade in goods and services made possible by the unbundling of the production process. (1) Hence, economic theory suggests that it should have a positive impact on firm-level productivity. (2)

However, the evidence in the recent literature measuring the impact of outsourcing on productivity is somewhat mixed (Olsen, 2006). For example, Girma and G6rg (2004) find that out- sourcing in the United Kingdom, which was at least in part a cost-reducing strategy, raised productivity for some domestic manufacturing industries, especially for exporters. The greater impact of outsourcing on the productivity of exporters is also confirmed for the United States by Kurz (2006), for Ireland by Gorg, Hanley, and Strobl (2008), and for Germany by Wagner (2011). But Criscuolo and Leaver (2005) find that in the United Kingdom most of the benefits of outsourcing accrue to firms that are not globally engaged. Similarly, Amiti and Wei (2006) find that (service) outsourcing, which does not contribute to job losses, contributes to higher total factor productivity (TFP). And Egger and Egger's (2006) study of 12 European Union countries suggests that the impact of outsourcing can change over time: It can have a negative impact on the real value added of workers in the short run, but this impact can be positive in the long run. …

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