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| Measuring the Different Impacts of Outsourcing |
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April-June 2006 |
The steady decline in the share of industry in total employment currently seems to have been accelerated by the forces of globalisation, and translates into factories being dismantled and eventually relocated abroad. Indeed, the rapid development of the international division of labour, as fostered by the emergence of competitors with a very broad spectrum of comparative advantages in industrial activities (e.g. China), and sometimes in services too (e.g. India), has revived a leitmotiv in public debate in Europe, Japan and the United States: the “hoovering-up” of jobs by competition from low-wage economies.
The BACI database developed by the CEPII makes it possible to calculate the respective contributions of the “South” and the “North” to the growth in volume of world trade. The striking change observed when comparing the mid- and the late 1990s is the surge in the contribution of the South. In the first period, two thirds of the growth in world exports were attributable to developed economies’ exports, while more than half is attributable to the South in the second period: the South is now the main engine of growth in world trade.
The recent controversy over the welfare impact of outsourcing between Samuelson and Bhagwati et al. should not hide the fact that the perception of globalisation by a large majority of economists is less alarming than that held by the general public. De-industrialisation is primarily a natural outcome associated with the development of modern societies; it results from demand, supply and relative price effects. However, regarding the latter, it is not possible to neglect the evidence that the new competitors, combining low labour costs with satisfactory productivity levels, depress international prices for manufactured products.
In order to properly address these issues, Boulhol & Fontagné define offshore outsourcing in a broader sense, which is generally adopted in the public debate, namely trade in goods with countries where offshoring takes place. They replicate and extend Rowthorn & Ramaswami’s work using a different econometric methodology (GMM, data for 1970-2002). Basically, the idea is to determine the responsibility of outsourcing in observed de-industrialisation. The contribution of trade with low-wage economies explains 20% (on average) of the observed decline in the share of manufacturing employment within the OECD.
Based on these estimations, it may be asked what would the share of manufacturing employment have been in 2002, if the OECD countries had maintained their trade ratios with developing countries, at the 1970 level. For the USA, Japan and France, trade with developing countries has led respectively to the displacement of around 3.3 million, 1.4 million and 350 000 manufacturing jobs, compensated by jobs created in the service sector.
Relying on microeconomic evidence complements the previous analysis based on sectoral data. What are the effects at home when a domestically-owned, multinational firm decides to launch a business abroad, in particular when a location in a low-wage country is chosen? Data for French manufacturing firms over the period 1988-1998 has been used (Hijzen, Jean & Mayer, 2006, forthcoming CEPII Working Paper) to complement the existing literature (e.g. Hanson, Slaughter & Mataloni, 2005 or Arnold & Smarzynska, 2005). The evaluation of the causal effect of establishing an affiliate abroad on a range of observable outcomes (employment, skills intensity, productivity) is clear-cut: relocation only represents a small fraction of FDI, and its effects on employment at home are likely to be temporary, thanks to the overall gains in efficiency of the firm.
Indeed, the bulk of FDI is North-North and mainly motivated by the proximity to consumers and agglomeration rent-seeking (Fontagné & Mayer, 2005). Higher labour costs are often found to increase inward FDI, in advanced economies. However, within these countries, corporate taxation is found to matter, although it must be balanced against the provision of public goods (Bénassy-Quéré, Fontagné & Lahrèche-Révil, 2005; Bénassy-Quéré, Gobalraja & Trannoy, 2006, see research summary in this Newsletter). Turning to the new EU member states, there is little evidence that (falling) corporate taxation is central to attracting FDI, although in the future these countries are likely to resemble the EU15 countries more (Lahrèche-Révil, 2006).
Overall, competition from the South (via specialisation or offshore outsourcing) is responsible for only a limited part of the concerns referred to above, even if adjustment costs can indeed be large and painful in certain regions, or for certain categories of workers. |
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ARNOLD, J. & JAVORICK, B. S., Gifted Kids or Pushy Parents? Foreign Acquisitions and Plant Performance in Indonesia, CEPR Discussion Paper, May 2005.
BENASSY-QUERE, A., FONTAGNE, L. & LAHRECHE-REVIL, A., How Does FDI React to Corporate Taxation?, International Tax and Public Finance, Volume 12, N°5: 583 - 603, September 2005.
BHAGWATI, J., PANAGARIYA, A. & SRINIVASAN, T.N., The Muddles over Outsourcing, Journal of Economic Perspectives Volume 18, N°4: 93-114, Fall 2004.
BOULHOL, H. & FONTAGNE, L., Deindustrialisation and the Fear of Relocations in the Industry, CEPII Working Paper N°2006-07, March 2006.
CHEPTEA, A., GAULIER, G. & ZIGNAGO, S., World Trade Competitiveness: A Disaggregated View by Shift-Share Analysis, CEPII Working Paper N° 2005-23.
FONTAGNE, L. & MAYER, T., Determinants of Location Choices by Multinational Firms: A Review of the Current State of Knowledge, Applied Economics Quarterly, Volume 51, Supplement: 9-34, 2005.
HANSON, G., MATALONI, R. & SLAUGHTER, M., Vertical Production Networks in Multinational Firms, Review of Economics and Statistics, Volume 87, N°4: 664-678, November 2005.
LAHRECHE-REVIL, A., Who’s Afraid of Tax Competition?
Harmless Tax Competition from the New European Member States, CEPII Working Paper N° 2006-11, June 2006.
RAMASWAMY, R. & ROWTHORN, R.E., Growth, Trade an Deindustrialization, IMF Working Paper, WP/98/60, 1998.
SAMUELSON, P. A., Where Ricardo and Mill Rebut and Confirm Arguments of Mainstream Economists Supporting Globalization, Journal of Economic Perspectives Volume 18, N°3: 135-146, Summer 2004. |
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