Academic journal article Economic Inquiry

Does Offshoring Pay? Firm-Level Evidence from Japan

Academic journal article Economic Inquiry

Does Offshoring Pay? Firm-Level Evidence from Japan

Article excerpt


The rise in offshoring--as reflected by the rising importance of imported intermediate inputs in domestic production--has been an important factor behind the growth in world trade (Yeats 1998; Yi 2003). East Asia is not an exception to the rise in offshoring: The growing geographical specialization along the value chain has given rise to the development of sophisticated production sharing arrangements within East Asia (Fukao, Ishido, and Ito 2003; Ng and Yeats 1999). In particular, Japanese firms have increasingly taken advantage of the business opportunities provided through offshoring of production activities to other East Asian countries (Kimura and Ando 2005).

Given the importance of these developments, understanding implications of offshoring should be of significant interest to academics and the policy-making community. However, most research so far has concentrated on the potentially adverse labor market aspects of offshoring in developed countries (Feenstra and Hanson 1996, 1999; Head and Ries 2002; Hijzen, Gorg, and Hine 2005), and much less attention has been directed toward understanding the benefits of the offshoring phenomenon. However, firms may benefit from offshoring through the improvement of the productivity of primary factors of domestic production by allowing firms to specialize in activities they perform relatively well.

For our analysis of the impact of offshoring on productivity, we make use of firm-level data for the Japanese manufacturing sector during the period 1994-2000. One great advantage of our data set is that it comprises information on the value of purchases of products, parts, and components from foreign providers so that we can construct a direct measure of materials offshoring. (1) This measure includes both sourcing to the firm's foreign affiliates and sourcing to other unaffiliated foreign firms. We refer to the combination of the two types of sourcing of intermediate inputs as "overall offshoring." In addition, we have data on the amount of purchases from the firm's foreign affiliates, which provides us with a proxy for the extent of international sourcing within the firm, or "intrafirm offshoring." (2) In contrast, we refer to sourcing from unaffiliated foreign firms as "arm's-length offshoring." (3) By including both measures simultaneously, we can infer to what extent the organizational form of offshoring, intrafirm or arm's length, influences productivity of the sourcing firm. Finally, we also consider the effects of sourcing to domestic providers, which we refer to as "domestic sourcing." Figure 1 provides a schematic overview of the various types of sourcing mentioned above.

Several previous studies have analyzed the relation between offshoring and productivity using industry-level data. For the measurement of offshoring, such studies typically rely on input-output data. Egger and Egger (2006) analyze how offshoring affects the productivity of low-skilled workers employed in the European Union manufacturing sector. They find that the rise in offshoring accounted for 6% of the increase in value added per worker during the period 1992-1997. Amiti and Wei (2006) analyze the productivity effects of materials and services offshoring on the productivity of U.S. industries. They find that both materials and services off shoring have a positive effect on productivity but that the positive effect of services offshoring is considerably larger, accounting for about 11% of productivity growth during the sample period compared to 5% for materials offshoring.


Gorg and Hanley (2005) and Gorg, Hanley, and Strobl (2008) were the first to analyze the impact of offshoring on productivity using firm-level data. The main advantage of using firm-level data is, no doubt, that they allow one to control for firm heterogeneity. Using data for Ireland, they find that both materials and services offshoring benefit firm productivity but that the benefits only accrue to multinationals and exporters. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed


An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.