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Offshoring, domestic outsourcing and productivity: evidence for a number of European countries

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The growth in offshoring and its economic effects have been subject to extensive empirical analysis. Yet, many studies have not distinguished accurately between offshoring, domestic outsourcing, and supplier changes. The present study provides stylized facts on offshoring in Europe between 1995 and 2008 taking into account this distinction. This study shows that service activities have been systematically offshored and outsourced domestically during this period, whereas manufacturing activities have been systematically offshored or moved from domestic to foreign suppliers. Overall the share of internal production has gone down by 4.5 percentage points, which raises the question whether firms have achieved productivity gains through this specialisation effort. Combining industry-level data on offshoring and domestic outsourcing with a firm panel, this study finds that service offshoring and offshoring of non-core manufacturing activities have contributed to an increase in productivity, whereas no statistically significant link is found for offshoring of core manufacturing activities and domestic outsourcing. The estimated productivity gains are found to be driven in particular by the gains of multinational firms.

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  1. See Olsen (2006) for an early survey of the offshoring-productivity literature.

  2. See Amiti and Wei (2009) for a similar summary of channels for productivity effects.

  3. Henceforth, this study refers only to offshoring, to keep the explanations brief. However, equivalent arguments apply for domestic outsourcing.

  4. The only difference is in the denominator. In Feenstra and Hanson (1999) offshoring is scaled by non-energy inputs, while in this study offshoring is scaled by output.

  5. Australia, Belgium, Canada, the Czech Republic, Denmark, Estonia, Greece, Hungary, Ireland, Japan, the Republic of Korean, Luxembourg, the Slovak Republic, the United States.

  6. Downloadable at See Timmer (2012) for detailed information on the methods applied in the construction of the world input–output table. All information on WIOD presented in the following is taken from this background document.

  7. See Winkler and Milberg (2009) and Castellani et al. (2011) and Feenstra and Jensen (2012) for detailed information on measurement problems in offshoring measures.

  8. For brevity, the nine considered European countries are henceforth often labeled as “Europe”.

  9. Note that the shares of these components in output would sum to 100% if inputs from the primary sector and some remaining service industries (e.g. transport services) were included in the offshoring measures and the domestic outsourcing measures.

  10. Note that the increase in service offshoring and domestic service outsourcing could be also due to newly created services. It is not possible to verify this possibility with input-output data as the composition of internal production (i.e. the share of internal services, core activities, and non-core activities) is unknown.

  11. For detailed graphical representations of offshoring and domestic outsourcing in the time series dimension, see the Online Appendix (figure 1–4).

  12. The TFP estimations were also conducted with the Levinsohn–Petrin method to account for a possible simultaneity bias. Yet, this caused partly implausible point estimates for some of the industries, such as negative coefficients for capital. For this reason the following analysis is based on simple ordinary least square (OLS) estimates of TFP.

  13. See the Online Appendix for a breakdown of the average firm performance by industry.

  14. In order to trace ownership changes over time, an attempt was made to use ownership information from past editions of the Amadeus database, where each of these editions would provide the ownership information at the current point in time. However, this strategy was discarded after careful inspection of the data, since Amadeus does not regularly update the ownership information and since the coverage for these variables is small in the earlier editions.

  15. An increase in offshoring implies by construction a decrease in the internal production if domestic outsourcing is held constant.

  16. An exception is Winkler (2010) who controls for domestic outsourcing using German input–output tables.

  17. It is possible, though, that industry–specific shocks jointly determine firm productivities and world offshoring, in which case the instruments may become invalid. For instance, one may think of a technological invention which raises firm productivity and offshoring simultaneously. While I cannot address this problem in a general way, I am able to rule out biases related to technology by controlling for R&D intensities.


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I am grateful to Holger Görg, to participants of the Aarhus-Kiel-Workshop 2010, the Göttingen Workshop 2011, and the ISGEP Workshop 2011 in Lüneburg for helpful comments. Research for this paper was supported through the European Commission, Research Directorate General as part of the 7th Framework Programme, Theme 8: Socio-Economic Sciences and Humanities, Grant Agreement no: 244552.

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Correspondence to Tillmann Schwörer.

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Schwörer, T. Offshoring, domestic outsourcing and productivity: evidence for a number of European countries. Rev World Econ 149, 131–149 (2013).

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