Keiko Ito (Senshu University)Kiyoyasu Tanaka (Institute of Developing Economies)

WIOD Conference on Industry‐Level Analyses ofGlobalization and its Consequences

Technische Universitaet Wien, ViennaMay 26-28, 2010

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Does Material and Service Offshoring Improve Domestic Productivity?

Evidence from Japanese manufacturing industries

Motivation

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Progress in fragmentation of production processes and the international division of labor in East Asia

Increase in offshoring to Asia contributed to skill-upgrading in Japan (Ahn et al. 2008, etc.)

Statistical evidence so far that offshoring enhances productivity is still weak

Particularly, on the effects of service offshoring, empirical evidence is scarce

Definition of offshoring

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Olsen (2006)“Offshoring” refers to : “Relocation of jobs and processes to any

foreign country without distinguishing whether the provider is external or affiliates with the firm”

“International outsourcing”: relocation of business activities to unaffiliated foreign firms

+“International insourcing” : relocation of

business activities to affiliated foreign firms

The purpose of this study

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Utilizing the comprehensive I-O Tables, relatively detailed industry-level data, and trade statistics, we measure the size of offshoring of material inputs and services inputs, and examine the trend and characteristics of offshoring for Japanese manufacturing

Using industry-level data, we investigate the impact of offshoring on domestic productivity for the case of Japanese manufacturing

Test for the presence of productivity-enhancing effects for both material offshoring and service offshoring

Examine how the effects differ for offshoring to different regions and of different activities

Potential impacts of offshoring on productivity

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By relocating inefficient tasks to low-cost countries, the unit cost of the firm’s product falls (=cost savings)

By offshoring less productive stages of production process, firms can shift corporate resource to high-productivity activities (product development, process innovation, etc.) (=restructuring)

The use of new varieties of imported material or service inputs may increase productivity (=variety effect)

Technological innovations (ICT, transportation), erosion of trade barriers

Previous studies (Industry-level studies)

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Egger & Egger (2006): EU mfg. 1992-97 Offshoring has a +tive effect on low-skilled

worker labor productivity in the long runAmiti & Wei (2006, 2009): US mfg. 1992-2000

(TFP & LP) Service offshoring (++) Material offshoring (+)Daveri & Jona-Lasinio (2008): Italian mfg. 1995-

2003 Material offshoring (+) Service offshoring (0)Lin & Ma (2008): Korean mfg. 1985-2001 Marial offshoring (+) Service offshoring (-)

Previous studies (Micro-level studies)

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Görg & Hanley (2005): Irish electronics firms (1990-95)

Material offshoring (+) only for plants with low exp intensities

Service offshoring (0)Görg, Hanley & Strobl (2008): Irish mfg Service offshoring (++) only for exporters

-- service offshoring requires knowledge to search for partners

Hijzen, Inui & Todo (2006): Japanese mfg (1994-2000) Offshoring (+) 4x greater effect than domestic outsourcing

Fariñas & Martín-Marcos (2008): Spanish mfg (1990-2002)

Offshoring (+)

Unclear effects of service offshoring

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McKinsey Global Institute (2005, 2008) US service offshoring to India + on US economy

Germany & France -tiveDaveri & Jona-Lasinio (2008) - transitional adjustment costs? ( low re-employment

rates, less flexible labor mkt, low job creation)

- most productive services are offshored to escape existing inefficiencies at home? ( insufficient liberalization)

Lin & Ma (2008): language barriersMGI (2005) : wage levels of destination

countries, competitiveness of the home country, ownership structure of affiliated offshore providers

Measurement of offshoring

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Offshoring =(imported intermediate inputs from all industries) / (total non-energy intermediate inputs)

Material offshoring: z=MO (j=mfg. industries)Service offshoring: z=SO (j=offshorable services) - telecommunications, insurance, finance, business

services, information servicesData: 1990, 1995, 2000 I-O tables (benchmark)Trade statistics (MOF, Japan), METI extended I-O Tables,

BOP statistics, JIP database 2009

i

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j ij

i Y

mz

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j i

j

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iji Y

IM

IM

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Table1. Material & service offshoring in Jpn mfg

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1990 1995 2000 2004(%) (%) (%) (%) (% points) (%)

Imported inputs as a percentage share of total inputsMaterials 5.95 6.29 7.69 8.89 2.95 49.57of which:

from North America 2.16 2.08 2.29 1.96 -0.21 -9.63from EU 1.21 1.14 1.32 1.56 0.35 28.81from Asia 1.60 2.24 3.23 4.40 2.80 175.56

from China 0.29 0.60 0.98 1.73 1.44 505.10from ASEAN4 0.48 0.61 0.96 1.16 0.68 140.19

Services 0.21 0.20 0.23 0.19 -0.02 -11.50of which:

from North America 0.09 0.09 0.11 0.08 -0.003 -3.72from EU 0.06 0.04 0.05 0.06 -0.008 -11.72from Asia 0.04 0.05 0.05 0.04 -0.008 -18.78

from China 0.01 0.01 0.01 0.01 0.003 47.09from ASEAN4 0.01 0.01 0.01 0.01 -0.002 -20.16

Change 1990-2004

US: 12-17 %Italy & Korea:

20+%

US: 0.18-0.29 %

Italy & Korea: 1+%

Estimation model

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Production function

Regression Model

Include industry dummies & year dummiesInclude one-year lags of offshoring variablesEndogeneity --- Use Value added per worker as a

dependent variableData for S, M, L, K --- JIP Database 2009, 1988-2004

tititititititi KLMSFMOSOTQ ,,,,,,, ,,,,

tititititititititi eLnKLnLLnMLnSMOSOLnQ ,,4,3,2,1,2,10,

tittii

tititititititi LnKLnLLnMLnSMOSOLnQ

,

,4,3,2,1,2,10,

Table 3. OLS estimates of the effect of offshoring on TFP (1)

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Dependent variable: Δln (Real Output)(1) (2) (3) (4)

-0.58 -0.588 -0.588(1.627) (1.511) (1.497)

0.387 0.374 0.31(1.071) (0.706) (0.753)

0.408* 0.445* 0.380*(0.198) (0.183) (0.152)

0.35 0.258 0.207(0.296) (0.230) (0.191)

0.542*** 0.518*** 0.544*** 0.542***(0.048) (0.045) (0.050) (0.050)

0.07 0.068* 0.071* 0.075*(0.036) (0.029) (0.035) (0.035)0.084 0.072 0.074

(0.057) (0.055) (0.065)0.159

(0.130)-0.079(0.131)

0.262* 0.279* 0.267* 0.267*(0.105) (0.105) (0.109) (0.109)

Year Dummies yes yes yes yesIndustry Dummies no no no noObservations 800 800 750 750R-squared 0.641 0.621 0.635 0.637

Δ ln(Number of Workers)

Δ ln(Number of Production Workers)

Δ Service Offshoring

Δ Service Offshoring, t-1

Δ ln(Material Input)

Δ ln(Service Input)

Δ ln(Capital Stock)

Δ Material Offshoring

Δ Material Offshoring, t-1

Δ ln(Number of NonproductionWorkers)

Table 3. OLS estimates of the effect of offshoring on TFP (2)

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Dependent variable: Δln (Real Output)(5) (6) (7) (8)

-0.613 -0.635 -0.658(1.716) (1.603) (1.604)

0.268 0.136 0.095(1.066) (0.674) (0.691)

0.151 0.19 0.175(0.132) (0.130) (0.129)

0.139 0.101 0.092(0.193) (0.171) (0.163)

0.479*** 0.467*** 0.484*** 0.486***(0.049) (0.046) (0.052) (0.052)0.062 0.061* 0.062 0.063

(0.032) (0.029) (0.033) (0.033)0.104 0.109 0.09

(0.057) (0.055) (0.068)0.103

(0.136)-0.012(0.133)

0.124* 0.142** 0.152** 0.149*(0.055) (0.050) (0.056) (0.057)

Year Dummies yes yes yes yesIndustry Dummies yes yes yes yesObservations 800 800 750 750R-squared 0.700 0.688 0.693 0.693

Δ ln(Number of Workers)

Δ ln(Number of Production Workers)

Δ Service Offshoring

Δ Service Offshoring, t-1

Δ ln(Material Input)

Δ ln(Service Input)

Δ ln(Capital Stock)

Δ Material Offshoring

Δ Material Offshoring, t-1

Δ ln(Number of NonproductionWorkers)

Robustness checks

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Labor productivity (VA per worker) specification Material offshoring +tive & significant

(Table 4)TFP growth specification Material offshoring +tive & significantAdditional controls (Table)

Material offshoring: +tively associated with domestic productivity

Service offshoring: insignificant

Table 5. OLS estimates of the effect of material offshoring to Asia on TFP

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Dependent variable: Δln (Real Output)(1) (2) (3) (4) (5) (6) (7) (8)

-0.638 -0.481 -0.489 -0.637 -0.565 -0.575(1.649) (1.528) (1.523) (1.720) (1.613) (1.615)

0.304 0.034 0.031 0.232 -0.027 -0.037(1.033) (0.674) (0.691) (1.048) (0.652) (0.652)

1.037** 1.015*** 0.966** 0.466* 0.622* 0.606*(0.303) (0.220) (0.288) (0.225) (0.234) (0.287)

1.242* 0.963** 0.915** 0.728 0.690* 0.675*(0.547) (0.356) (0.310) (0.425) (0.337) (0.320)

0.536*** 0.509*** 0.530*** 0.530*** 0.480*** 0.465*** 0.484*** 0.484***(0.045) (0.044) (0.046) (0.046) (0.047) (0.045) (0.049) (0.048)0.071* 0.074** 0.077* 0.078* 0.063 0.064* 0.066* 0.067*(0.035) (0.027) (0.032) (0.032) (0.032) (0.028) (0.031) (0.031)0.091 0.091 0.094 0.105 0.116* 0.098

(0.061) (0.051) (0.067) (0.060) (0.053) (0.069)0.258* 0.268* 0.260* 0.261* 0.127* 0.141** 0.156** 0.154**(0.104) (0.102) (0.105) (0.105) (0.055) (0.049) (0.056) (0.055)

Year Dummies yes yes yes yes yes yes yes yesIndustry Dummies no no no no yes yes yes yesObservations 800 800 750 750 800 800 750 750R-squared 0.641 0.621 0.635 0.637 0.7 0.688 0.693 0.693

Δ Material Offshoring to Asia

Δ Material Offshoring to Asia, t-1

Δ ln(Number of Workers)

Δ ln(Capital Stock)

Δ ln(Material Input)

Δ ln(Service Input)

Δ Service Offshoring

Δ Service Offshoring, t-1

Table 6. OLS estimates of the effect of information services offshoring on TFP

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Dependent variable: Δln (Real Output)(1) (2) (3) (4) (5) (6) (7) (8)

10.75 48.84 43.99 -0.341 65.72 65.40(21.480) (27.71) (32.42) (24.46) (43.04) (47.45)

82.62** 116.4** 108.5** 84.85** 146.5** 145.9*(24.36) (33.40) (37.80) (25.02) (49.01) (55.44)

0.409* 0.377* 0.343* 0.152 0.13 0.129(0.197) (0.164) (0.144) (0.132) (0.124) (0.126)

0.347 0.204 0.178 0.148 0.056 0.055(0.285) (0.213) (0.184) (0.186) (0.160) (0.155)

0.542*** 0.517*** 0.542*** 0.541*** 0.480*** 0.465*** 0.482*** 0.482***(0.049) (0.044) (0.050) (0.050) (0.049) (0.045) (0.052) (0.052)0.071 0.068* 0.074* 0.076* 0.063 0.061* 0.066 0.066

(0.036) (0.030) (0.036) (0.036) (0.032) (0.030) (0.034) (0.034)0.084 0.07 0.071 0.105 0.105 0.082

(0.057) (0.057) (0.068) (0.057) (0.057) (0.072)0.261* 0.272* 0.258* 0.259* 0.124* 0.130* 0.135* 0.135*(0.105) (0.107) (0.112) (0.111) (0.055) (0.052) (0.062) (0.061)

Year Dummies yes yes yes yes yes yes yes yesIndustry Dummies no no no no yes yes yes yesObservations 800 800 750 750 800 800 750 750R-squared 0.641 0.621 0.635 0.637 0.700 0.688 0.693 0.693

Δ ln(Capital Stock)

Δ ln(Material Input)

Δ ln(Service Input)

Δ ln(Number of Workers)

Δ Information ServicesOffshoringΔ Information ServicesOffshoring, t -1

Δ Material Offshoring

Δ Material Offshoring, t-1

Summary of the results

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Material offshoring: +tively associated with domestic productivity

Service offshoring overall: insignificant

Material offshoring to Asia : +tive & significantMaterial offshoring to NA & EUR: insignificant Characteristics of destination country do matter

Offshoring to low-cost region brings greater productivity gains

Information service offshoring: +tive & significantBusiness service offshoring: insignificant

Effect of service offshoring on productivity

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Business services involve a substantial amount of judgment & communication b/w clients & professionals

These tasks need to be standardized & reorganized in order for foreign firms to provide them from a distance

Peculiarities of Japanese language & business culture may be a barrier

Conclusion

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Material offshoring has a positive effect on productivity while service offshoring does not. (in line with previous results of Italy & Korea, but at odds with results of U.S.)

Although the level of service offshoring is still low, increase in info service offshoring would improve productivity.

However, it has been pointed out that the corporate organization of Jpn firms is not well suited to standardized IT systems. (decision-making processes require substantial interdivisional comm. ) (Motohashi 2008)

Firms which restructure their IT management method would be able to benefit from offshoring of services.

Material offshoring to Asia has a positive effect on productivity. The large differences b/w factor prices at home & Asian countries, coupled with geographic proximity, appears to have yielded a productivity-enhancing effect.

Future research

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Peculiarities of the Japanese business practice or peculiarities of the Japanese langugage & culture? examine effects of “international” outsourcing and “domestic” outsourcing of business services

Effects of offshoring on various types of workers (low-skilled or high-skilled workers)

Productivity effect of service offshoring by region

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Thank you!