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Outsourcing, Offshoring and
Adjustment in the Global Economy
Presentation prepared for Munich Economic Summit, 4 May 2006
John Whalley
(University of Western Ontario, CESifo & NBER)
Outsourcing

Purchase of goods and services that were
previously produced inside a company.

Company producing the goods and services
can be located in the same country (domestic
outsourcing) or outside the country of the
purchasing company (international
outsourcing).
4 May 2006
5th Munich Economic Summit
Offshoring


Purchase of goods and services previously
produced while inside the purchasing
company from companies in locations outside
the country.
Covers not only international outsourcing, but
also international insourcing with foreign
affiliates of domestic parent companies
exporting to their parents.
4 May 2006
5th Munich Economic Summit
Outsourcing in Research Literature
Grossman – Helpman (2002)
 Outsourcing implies more than purchase of raw
materials and standardized intermediate inputs. It
involves vertical disintegration of production with
relationship-specific partners.
 Outsourcing... “means finding a partner with which a
firm can establish a bilateral relationship and having the
partner undertake relationship specific investments so
that it becomes able to produce goods and services that
fit the firm’s particular needs”
Bhagwati, Panagariya, Srinivasan (2004)
 Outsourcing of services, including professional services.
Outsourcing equated with long distance purchases of
services by electronic media, such as phone and fax.
4 May 2006
5th Munich Economic Summit
Measuring Outsourcing

Abraham & Taylor (1996) document increase in
outsourcing of business services in 13 US industries.

Camper and Goldberg (1997) measure outsourcing of
intermediate inputs for various industries in Canada,
Japan, the UK, the US and except Japan show a
doubling in the share of imported inputs between 1975
and 1996.

Feenstra (1998) measures all imported components used
in production by US firms and computes various
measures of outsourcing arguing all have increased
since the 1970s.

Tomiura (2005) reports relatively few Japanese firms
outsource across national boundaries.
4 May 2006
5th Munich Economic Summit
Impacts of Outsourcing

Direct wage effects / employment effects in OECD as production
moves offshore.

Indirect effects on bargaining power of unions in OECD from
prospect of outsourcing.

Feenstra / Hanson (1996, 1997) find outsourcing increases wage of
skilled versus unskilled labour in both US & Mexico.

Feenstra / Hanson (1999) find US outsourcing raises real wage of
US non production workers by 0.16% / year and also real wage of
US production workers (slightly) by 0.01% / year.

Dreher and Gaston (2005) report results indicating various
measures of globalization are negatively correlated with both union
bargaining power and union membership

Amiti / Wei (2006) find between 1992 and 2000 service outsourcing
(technical support, medical claims processing, software
development) account for around 11% of US manufacturing
productivity growth, compared to a 3-6% gain from imported
material inputs.
4 May 2006
5th Munich Economic Summit
Outsourcing to China, Channels of Economic
Integration, and Adjustment Pressures

Adjustment pressures stem not only from component sales,
but also final stage transactions involving OECD retailers. A
variety of channels for such transactions exist.

Resourcing of component and final stage suppliers across
national borders.

Insourcing – Chinese companies buying OECD firms;
keeping distribution system in OECD & moving production
back to China.

Throughsourcing – Trade related transactions orchestrated
and conducted via middlemen in Hong Kong (plus Korea,
Taiwan)

Roundaboutsourcing – preferential tax and other policies
towards foreign invested enterprises generate outflows from
China to be returned to trade oriented enterprises.
4 May 2006
5th Munich Economic Summit
OECD adjustments and Outsourcing

Current adjustments and potential future
adjustments.

Size of low wage labour pool in China / India /
Indonesia

FIEs in China now account for 60% of exports but
only 3% of employment.

China’s exports growing at 35-40% / year

Cumulative OECD FDI into China ≈US$500 bill.

In OECD GDP ≈ $25 trillion. If K/Y ratio is 3,
OECD capital stock ≈ $75 trillion.

Adjustments in OECD from outsourcing may be
only in their infancy?
4 May 2006
5th Munich Economic Summit