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Does Offshoring Pay? Firm-Level Evidence from Japan

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Author Info
Alexander HIJZEN
INUI Tomohiko
TODO Yasuyuki

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Abstract

This paper explores the impact of offshoring, or contracting out of business activities to foreign providers, on firm productivity, using Japanese firm-level data for the period 1994-2000. We find that offshoring has generally a positive effect on productivity growth. This effect is robust to controlling for the possible endogeneity of offshoring with respect to unobserved productivity shocks. Our preferred specification suggests that a one percent increase in offshoring intensity raises productivity growth by 0.17 percent. For the average offshoring firm this implies a 1.8 percent increase in annual productivity growth. These results do not appear to depend much on either the level of technological sophistication of a firms' industry or a firms' international orientation. However, we find that the scope for productivity improvements from offshoring depends negatively on the initial level of productivity of the firm.

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Paper provided by Research Institute of Economy, Trade and Industry (RIETI) in its series Discussion papers with number 07005.

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Length: 33 pages
Date of creation: Mar 2007
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Handle: RePEc:eti:dpaper:07005

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Karsten Bjerring Olsen, 2006. "Productivity Impacts of Offshoring and Outsourcing: A Review," OECD Science, Technology and Industry Working Papers 2006/1, OECD, Directorate for Science, Technology and Industry. [Downloadable!]
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  3. G. Steven Olley & Ariel Pakes, 1992. "The Dynamics of Productivity in the Telecommunications Equipment Industry," NBER Working Papers 3977, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Philippe Aghion & Richard Blundell & Rachel Griffith & Peter Howitt & Susanne Prantl, 2004. "Entry and Productivity Growth: Evidence from Microlevel Panel Data," Journal of the European Economic Association, MIT Press, vol. 2(2-3), pages 265-276, 04/05. [Downloadable!] (restricted)
  5. Head, Keith & Ries, John, 2002. "Offshore production and skill upgrading by Japanese manufacturing firms," Journal of International Economics, Elsevier, vol. 58(1), pages 81-105, October. [Downloadable!] (restricted)
  6. Alwyn Young, 1991. "Learning by Doing and the Dynamic Effects of International Trade," NBER Working Papers 3577, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Kimura, Fukunari & Ando, Mitsuyo, 2005. "Two-dimensional fragmentation in East Asia: Conceptual framework and empirics," International Review of Economics & Finance, Elsevier, vol. 14(3), pages 317-348. [Downloadable!] (restricted)
  8. Wilhelm Kohler, 2004. "International outsourcing and factor prices with multistage production," Economic Journal, Royal Economic Society, vol. 114(494), pages C166-C185, 03. [Downloadable!] (restricted)
  9. Görg, Holger & Hanley, Aoife & Strobl, Eric, 2007. "Productivity Effects of International Outsourcing: Evidence from Plant Level Data," CEPR Discussion Papers 6361, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  10. Jaffe, Adam B & Trajtenberg, Manuel & Henderson, Rebecca, 1993. "Geographic Localization of Knowledge Spillovers as Evidenced by Patent Citations," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 577-98, August. [Downloadable!] (restricted)
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  11. Alexander Hijzen, 2007. "International Outsourcing, Technological Change, and Wage Inequality," Review of International Economics, Blackwell Publishing, vol. 15(1), pages 188-205, 02. [Downloadable!] (restricted)
  12. Ng, Francis & Yeats, Alexander, 1999. "Production sharing in East Asia : who does what for whom, and why?," Policy Research Working Paper Series 2197, The World Bank. [Downloadable!]
  13. Gorg, Holger & Hanley, Aoife, 2005. "International outsourcing and productivity: evidence from the Irish electronics industry," The North American Journal of Economics and Finance, Elsevier, vol. 16(2), pages 255-269, August. [Downloadable!] (restricted)
  14. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August. [Downloadable!] (restricted)
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  15. Yeats, Alexander J., 1998. "Just how big is global production sharing?," Policy Research Working Paper Series 1871, The World Bank. [Downloadable!]
  16. Olley, G Steven & Pakes, Ariel, 1996. "The Dynamics of Productivity in the Telecommunications Equipment Industry," Econometrica, Econometric Society, vol. 64(6), pages 1263-97, November. [Downloadable!] (restricted)
  17. Young, Alwyn, 1991. "Learning by Doing and the Dynamic Effects of International Trade," The Quarterly Journal of Economics, MIT Press, vol. 106(2), pages 369-405, May. [Downloadable!] (restricted)
  18. James Levinsohn & Amil Petrin, 2003. "Estimating Production Functions Using Inputs to Control for Unobservables," Review of Economic Studies, Blackwell Publishing, vol. 70(2), pages 317-341, 04. [Downloadable!] (restricted)
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  19. David H. Good & M. Ishaq Nadiri & Robin C. Sickles, 1996. "Index Number and Factor Demand Approaches to the Estimation of Productivity," NBER Working Papers 5790, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  20. Branstetter, Lee G., 2001. "Are knowledge spillovers international or intranational in scope?: Microeconometric evidence from the U.S. and Japan," Journal of International Economics, Elsevier, vol. 53(1), pages 53-79, February. [Downloadable!] (restricted)
  21. Kimura, Fukunari, 2002. " Subcontracting and the Performance of Small and Medium Firms in Japan," Small Business Economics, Springer, vol. 18(1-3), pages 163-75, Feb.- May. [Downloadable!] (restricted)
  22. Kei-Mu Yi, 2003. "Can Vertical Specialization Explain the Growth of World Trade?," Journal of Political Economy, University of Chicago Press, vol. 111(1), pages 52-102, February. [Downloadable!] (restricted)
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  23. Alexander Hijzen & Holger Görg & Robert C. Hine, 2004. "International Outsourcing and the Skill Structure of Labour Demand in the United Kingdom," Discussion Papers of DIW Berlin 437, DIW Berlin, German Institute for Economic Research. [Downloadable!]
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  24. Tomiura, Eiichi, 2005. "Foreign outsourcing and firm-level characteristics: Evidence from Japanese manufacturers," Journal of the Japanese and International Economies, Elsevier, vol. 19(2), pages 255-271, June. [Downloadable!] (restricted)
  25. Caves, Douglas W & Christensen, Laurits R & Diewert, W Erwin, 1982. "Multilateral Comparisons of Output, Input, and Productivity Using Superlative Index Numbers," Economic Journal, Royal Economic Society, vol. 92(365), pages 73-86, March. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Nana Bourtchouladze, 2007. "Offshoring and Heterogeneous Firms: One Job Offshored, One Job Lost?," HEI Working Papers 28-2007, Economics Section, The Graduate Institute of International Studies, revised Dec 2007. [Downloadable!]
  2. Spiros Bougheas & Holger Görg, 2008. "Organizational forms for global engagement of firms," Kiel Working Papers 1448, Kiel Institute for the World Economy. [Downloadable!]
  3. Holger Görg & Aoife Hanley, 2008. "Services Outsourcing and Innovation: An empirical investigation," Kiel Working Papers 1417, Kiel Institute for the World Economy. [Downloadable!]
  4. MATSUURA Toshiyuki & MOTOHASHI Kazuyuki & HAYAKAWA Kazunobu, 2008. "How Does FDI in East Asia Affect Performance at Home?: Evidence from Electrical Machinery Manufacturing Firms," Discussion papers 08034, Research Institute of Economy, Trade and Industry (RIETI). [Downloadable!]
  5. ITO Banri & WAKASUGI Ryuhei & TOMIURA Eiichi, 2008. "Offshoring and Productivity: Evidence from Japanese Firm-level Data," Discussion papers 08028, Research Institute of Economy, Trade and Industry (RIETI). [Downloadable!]
  6. WAKASUGI Ryuhei & TODO Yasuyuki & SATO Hitoshi & NISHIOKA Shuichiro & MATSUURA Toshiyuki & ITO Banri & TANAKA Ayumu, 2008. "The Internationalization of Japanese Firms: New Findings Based on Firm-Level Data," Discussion papers 08036, Research Institute of Economy, Trade and Industry (RIETI). [Downloadable!]
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