Outscourcing has been a major concern all around the world in recent years. Here in New Zealand Alliance Party president Victor Billot is reported to have said,
... a manufacturing policy had to be introduced that stopped the bleed of skills and jobs to low wage economies, which had to include tariff and other support for producers, and disincentives for outsourcing and relocating corporates.In the US Alan Blinder warn that about the social affects of outscouring,
massive transformations in the nature of work tend to bring wrenching social changes in their wake.Mankiw and Swagel noted that in the runup to the 2004 US election,
outscourcing became synonymous in the public debate with job lossIs there any basis for such concerns?
This CEPR Policy Insight outlines empirical research that looks at the effects of outscouring on the Japanese domestic labour market. The research on which the policy Insight is based is
Ando, M. and F. Kimura (2007), 'International Production/ Distribution Networks and Domestic Operations in Term of Employment and Corporate Organization: Microdata Analysis of Japanese Firms,' September, Keio University mimeograph.First note that theoretically the effect of offshore outsourcing on domestic operations may be positive or negative. The outcome depends on whether the cost savings from offshoring make the firm more competitive, inducing it to expand at home, and whether the activities abroad are complementary to domestic operations.
To see what the actual effects of outscouring where for the Japanese labour market data from a comprehensive survey of firms with more than 50 workers or capital exceeding 30 million yen conducted by the Japanese government's Ministry of Economy, Trade, and Industry for fiscal years 1998 - 2003 was studied. The firms in the data set primarily offshore to East Asia.
A cursory examination of the data suggests that domestic employment is not reduced by offshoring. While the majority of firms in the survey cut jobs between 1998 and 2003, those expanding their operations in East Asia did so much less than those that did not. For example manufacturing firms going abroad for the first time averaged domestic employment growth of 9.1% and firms expanding their offshoring only cut domestic employment by 2.2%. In contrast, manufacturing firms with no change in their offshore presence reduced domestic employment by more than 5%, and those reducing their East Asian operations cut jobs by more than 10%.
Overall the data suggests that at the firm level pursuing foreign direct investment (FDI) in East Asia is associated with positive affects on employment, establishments and affiliates in the home market, Japan.
When econometric methods are applied to the data they demonstrate that the correlation noted above holds when the authors control for other variables, such as firm size, capital-intensity, the ratio of foreign to domestic sales, research and development activity, advertising expenditures, and foreign capital holding the firm. For manufacturing firms, expansion of operations in East Asia is associated with no decline in domestic employment. The analysis by Ando and Kimura also shows no statistically significant relationship between the expansion of manufacturing operations in East Asia and a decline in the number of domestic establishments or affiliates. They note, importantly, that domestic and foreign operations appear to be complements, not substitutes.
As to why this is the case Ando and Kimura point out that growth in manufacturing operations in East Asia and grow in domestic employment may reflect a need to expand domestic production of key parts and components exported to East Asia or an intensified specialisation in headquarters services at home as a result of fragmentation of production. It is also be possible that globalising manufacturing firms succeed in differentiating products produced in the domestic market from those produced elsewhere in East Asia.
It is also noted by Ando and Kimura that the positive impacts on domestic employment due to globalising manufacturing activities grow over time.
While expanding operations abroad are correlated with a 3% increase in domestic employment over a one year horizon, they are associated with an 8% increase over a five year period, compared with others.In summary,
The statistics and our formal analysis both suggest that globalising manufacturing firms are less likely to reduce their domestic employment than other firms. In fact, controlling for other firm characteristics, they experience greater job creation at a rate as high as 8%.Perhaps Mr Billot should think about these results.