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Offshoring and firm performance: self-selection, effects on performance, or both?

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Abstract

This paper uses unique new data for German manufacturing enterprises from matched regular surveys and a special purpose survey to investigate the causal effect of relocation of activities to a foreign country on firm performance. Compared to non-offshoring firms, firms that relocated activities were larger and more productive, and had a higher share of exports in total sales. These differences existed the year before some firms started to relocate, and this points to self-selection of “better” firms into offshoring. To investigate the causal effects of offshoring, six different variants of a matching approach are used. Contrary to what is often argued we find no evidence for a large negative causal effect of offshoring on employment in Germany.

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Notes

  1. In a representative survey of the German population (aged at least 16 years) performed in June 2006 78% associated “globalization” with relocation of jobs abroad, and 61% with a loss of jobs at home; see Institut für Demoskopie Allensbach (2006).

  2. Geishecker et al. (2008, p. 152) state that “academic research which analyses the phenomenon of outsourcing empirically is only in its infancy”. Similarly, Olsen (2006, p. 9) points out that “surprisingly little rigorous empirical research has been done on its economic impacts”.

  3. A related literature uses firm level data to investigate the causes and consequences of foreign sourcing, defined as the import of intermediate inputs. Recent contributions include Farinas and Martín-Marcos (2010) for Spain, Görg et al. (2008b) for Ireland, Ito et al. (2008) for Japan, Jabbour (2010) for France, Kurz (2006) for the United States and Morrison Paul and Yasar (2009) for Turkey.

  4. The same argument holds for sunk costs related to exporting and foreign direct investment; see Wagner (2007a) for a survey of the literature and Wagner (2006, 2007b) for studies with German firm level data.

  5. A related literature investigates empirically the consequences of outsourcing, defined as the relocation of activities between firms without distinguishing whether the provider is located in a foreign country or not. Studies with German firm level data include Görzig et al. (2005) and Addison et al. (2008), for the United Kingdom see Girma and Görg (2004), for Ireland Görg and Hanley (2004).

  6. I thank an anonymous referee for pointing out some flaws in my summary of the paper by Moser et al. (2009) in an earlier version of the present paper (see Wagner 2009).

  7. The consequences of these indirect effects for the matching approach used here in this paper to investigate the causal effects of offshoring will be discussed in Sect 3.3 below.

  8. A case in point is the IAB establishment panel used by Moser et al. (2009) in their study discussed in Sect. 1 above. See also the samples used in other studies based on firm level data from Germany summarized there.

  9. Participation in a special purpose surveys is voluntary, and the sample is limited to 20,000 units. A prerequisite for this kind of survey is either a pressing need for data in the process of preparing or substantiating a planned decision by a high government agency, or the clarification of a methodological question in statistics.

  10. Note that identical surveys have been conducted under the auspices of Eurostat in 11 other countries (Czech Republic, Denmark, Finland, Ireland, Italy, the Netherlands, Norway, Portugal, Slovenia, Sweden, and the United Kingdom); see Neureiter and Nunnenkamp (2010) for an empirical study using aggregate published data from these surveys to investigate the relation between modes of international sourcing and the competitiveness of firms.

  11. This has been pointed out by Roderich Egeler, the president of the German federal statistical office, when he presented results of the survey on relocation of economic activities at a press conference in Berlin on February 17, 2009. See Statistisches Bundesamt (2009, p. 10).

  12. Matching is technically feasible by using the enterprise number from the special purpose survey that is identical to the enterprise number used in regular surveys, and it is legal according to §13a BStatG.

  13. See Olsen (2006, p. 7) for this terminology and an illustrative matrix of insourcing, outsourcing and offshoring.

  14. Note that value added per employee cannot be used as a measure of productivity because information on value added is only available for a small subsample of the enterprises.

  15. Farinas and Martín-Marcos (2010) use this approach to look at differences between firms that engage in foreign sourcing—i.e. that import intermediate inputs—and firms that do not.

  16. See Caliendo and Kopeinig (2008) for a comprehensive introduction to propensity score matching and Wagner (2002) for a discussion of this method in the context of the effect of exports on productivity growth.

  17. The discussion of propensity score matching closely follows Caliendo and Kopeinig (2008).

  18. See Moser et al. (2009) for a discussion of the SUTVA in the context of offshoring and how violation of this assumption affects the interpretation of the ATT.

  19. Both the t-value reported by PSMATCH2 (that does not take into account that the propensity score is estimated) and a t-value based on bootstrapped values of the standard deviation of the propensity score with 100 replications is given in Table 3 (and the other tables reporting results of a matching approach). Abadie and Imbens (2008) show that bootstrapping is not appropriate for nearest neighbour matching estimators. This, however, is not true for kernel matching. Therefore, the decision about whether or not the ATT should be considered to be statistically different from zero is based on the bootstrapped standard errors of the estimations using the kernel matching approaches.

  20. Note that labour productivity cannot be measured as value added per employee because information on value added is only available for a small subset of enterprises in the data used. The error due to the use of sales per employee, however, is presumably small, because the differences- in-differences method controls for cross-sectional differences in production depth.

  21. A related result is reported in a recent study by Temouri et al. (2010) on the link between productivity effects and outward FDI of German firms. By presenting productivity growth effects across low and high cost locations over the period 1997–2006, their results show that the evidence relating outward FDI to productivity growth at home is generally positive but quite small.

  22. I thank an anonymous referee for suggesting this robustness check. The results of the probit estimates used in the matching approach are reported in Table 12 in the Appendix.

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Acknowledgments

All computations were carried out inside the research data centre of the Statistical Office in Halle. I thank Michael Rößner for running the Stata do-files and checking the output for violation of privacy. Many thanks to Nils Braakmann, Ingo Geishecker, Holger Görg, Aoife Hanley, Christian Pfeifer, Andreas Stephan and participants in the 4th ISGEP workshop in Valencia, October 1-2, 2009, the Economics Research Seminar at Leuphana University Lüneburg, October 21, 2009 and the Erich-Schneider Seminar at CAU Kiel, February 1, 2010, for helpful comments on an earlier version. Comments from two anonymous referees lead to a complete rewriting of the working paper version that circulates as Wagner (2009). The data used in this study are confidential but not exclusive; see Zühlke et al. (2004) for the rules to access the data inside the research data centre. To facilitate replication and extensions the Stata do-files used are available from the author on request.

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Correspondence to Joachim Wagner.

Appendix

Appendix

See Tables 11 and 12 below.

Table 11 Probit-regressions used to estimate the propensity score used in Sect. 3 a
Table 12 Probit-regressions used to estimate the propensity score used in Sect. 4 a

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Wagner, J. Offshoring and firm performance: self-selection, effects on performance, or both?. Rev World Econ 147, 217–247 (2011). https://doi.org/10.1007/s10290-010-0078-2

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