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Offshoring and Heterogeneous Firms: One Job Offshored, One Job Lost?

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    Abstract

    Offshoring has gained a significant momentum in recent years. Firm size appears to be the leading factor differentiating firms that offshore from those that do not. We present a model that blends offshoring, or trade in tasks, with a Melitz-style model of monopolistic competition with heterogeneous firms and show that this is indeed the case. Accounting for firm heterogeneity offers new tools for analyzing the effects of offshoring on the employment dynamics within an individual firm and at the aggregate sector level. We show that offshoring unambiguously reduces per-firm labour demand in smaller firms, but has ambiguous effects in larger firms. As a result, irrespective of whether or not the number of firms operating in the offshoring nation increases, the overall sector employment may increase or decrease. Policies promoting free trade have a significant role to play in job creation. The model also permits a straightforward derivation of positive and normative effects of offshoring: trade in tasks increases productivity of active firms and improves welfare in the offshoring nation.

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    File URL: http://repec.graduateinstitute.ch/pdfs/Working_papers/HEIWP28-2007.pdf
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    Bibliographic Info

    Paper provided by Economics Section, The Graduate Institute of International Studies in its series IHEID Working Papers with number 28-2007.

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    Length: 55
    Date of creation: Dec 2007
    Date of revision: Dec 2007
    Handle: RePEc:gii:giihei:heiwp28-2007

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    Keywords: Trade in tasks; offshoring; heterogeneous firms; employment; productivity; welfare;

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    1. Alexander Hijzen & Paul Swaim, . "Does offshoring reduce industry employment?," Discussion Papers 07/24, University of Nottingham, GEP.
    2. Baldwin, Richard & Forslid, Rikard, 2004. "Trade Liberalization with Heterogenous Firms," CEPR Discussion Papers 4635, C.E.P.R. Discussion Papers.
    3. Gene M. Grossman & Esteban Rossi-Hansberg, 2006. "Trading Tasks: A Simple Theory of Offshoring," NBER Working Papers 12721, National Bureau of Economic Research, Inc.
    4. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
    5. Catherine L. Mann, 2003. "Globalization of IT Services and White Collar Jobs: The Next Wave of Productivity Growth," Policy Briefs PB03-11, Peterson Institute for International Economics.
    6. Richard E. Baldwin & Frédéric Robert-Nicoud, 2007. "Offshoring: General Equilibrium Effects on Wages, Production and Trade," CEP Discussion Papers dp0794, Centre for Economic Performance, LSE.
    7. Deardorff, A.V., 1998. "Fragmentation in Simple Trade Models," Working Papers 422, Research Seminar in International Economics, University of Michigan.
    8. Alexander Hijzen & Tomohiko Inui & Yasuyuki Todo, 2010. "Does Offshoring Pay? Firm-Level Evidence From Japan," Economic Inquiry, Western Economic Association International, vol. 48(4), pages 880-895, October.
    9. Elhanan Helpman & Marc J. Melitz & Stephen R. Yeaple, 2004. "Export Versus FDI with Heterogeneous Firms," American Economic Review, American Economic Association, vol. 94(1), pages 300-316, March.
    10. Deardorff, A.V., 1998. "Fragmentation Across Cones," Working Papers 427, Research Seminar in International Economics, University of Michigan.
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    13. Cosimo Beverelli, 2007. "Offshoring and Manufacturing Employment: A General Equilibrium Analysis," IHEID Working Papers 25-2007, Economics Section, The Graduate Institute of International Studies, revised 11 Oct 2007.
    14. Jacob Funk Kirkegaard, 2007. "Offshoring, Outsourcing, and Production Relocation—Labor-Market Effects in the OECD Countries and Developing Asia," Working Paper Series WP07-2, Peterson Institute for International Economics.
    15. Richard E. Baldwin & Toshihiro Okubo, 2006. "Heterogeneous firms, agglomeration and economic geography: spatial selection and sorting," Journal of Economic Geography, Oxford University Press, vol. 6(3), pages 323-346, June.
    16. Karsten Bjerring Olsen, 2006. "Productivity Impacts of Offshoring and Outsourcing: A Review," OECD Science, Technology and Industry Working Papers 2006/1, OECD Publishing.
    17. Gorg, Holger & Hanley, Aoife, 2005. "Labour demand effects of international outsourcing: Evidence from plant-level data," International Review of Economics & Finance, Elsevier, vol. 14(3), pages 365-376.
    18. Davis, Donald R., 1995. "Intra-industry trade: A Heckscher-Ohlin-Ricardo approach," Journal of International Economics, Elsevier, vol. 39(3-4), pages 201-226, November.
    19. Egger, Peter & Pfaffermayr, Michael & Wolfmayr-Schnitzer, Yvonne, 2001. "The international fragmentation of Austrian manufacturing: The effects of outsourcing on productivity and wages," The North American Journal of Economics and Finance, Elsevier, vol. 12(3), pages 257-272, November.
    20. Findlay, Ronald & Jones, Ronald, 2000. "Factor bias and technical progress," Economics Letters, Elsevier, vol. 68(3), pages 303-308, September.
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