key topic

Offshoring

Offshoring is the relocation of an aspect of a business's operations from one country to another; typically, to a country where labor costs are lower. Offshored work is often contracted out to an external company (referred to as outsourcing). There is concern that offshoring leads to domestic job losses; however, the picture is more complicated.

  • Do global value chains create jobs?

    Impacts of GVCs depend on lead firms, specialization, skills, and institutions

    Thomas Farole, August 2016
    Global value chains (GVCs) describe the cross-national activities and inputs required to bring a product or service to the market. While they can boost exports and productivity, the resulting labor market impacts vary significantly across developing countries. Some experience large-scale manufacturing employment, while others see a shift in demand for labor from manufacturing to services, and from lower to higher skills. Several factors shape the way in which a country’s labor market will be impacted by GVC integration, including the type of sector, lead firms’ strategies, domestic skills base, and the institutional environment.
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  • Knowledge spillovers and future jobs

    In the future, jobs will be created by those bold enough to transform new ideas and knowledge into innovations

    David B. Audretsch, December 2015
    Globalization brings both good and bad job news. The bad news is that jobs will be outsourced from high-cost developed countries into lower-cost locations as soon as the associated economic activity becomes mechanized and predictable. The good news is that globalization creates opportunities that can be realized by people bold enough to transform new ideas and knowledge into innovations. In that way, entrepreneurs will play a vital role in creating the jobs of the future by transforming ideas and knowledge into new products and services, which will be the competitive advantage of the advanced economies.
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  • Trade, foreign investment, and wage inequality in developing countries

    Exposure to foreign trade raises the skill premium in countries with a large stock of educated workers and reduces it in others

    Alessandro Cigno, November 2015
    Liberalization of foreign trade and investment raises the domestic ratio of skilled to unskilled wages (skill premium) if the country has a sufficiently well-educated workforce, but lowers it otherwise. Wide wage inequality is undesirable on equity grounds, especially in poor countries where the bottom wage is close to the breadline; but it gives parents an incentive to invest in their children’s education. The incentive will be ineffective, however, if parents cannot borrow for their child’s education because of underdeveloped credit markets or because they are too poor to finance the investment from their own income and savings.
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  • Offshoring and the migration of jobs

    Offshoring has little net effect on domestic employment, while pushing domestic workers toward more complex jobs

    Gianmarco Ottaviano, July 2015
    The impact of offshoring on domestic jobs is more complicated than it first appears. In the standard narrative, offshoring production is thought to harm domestic workers by providing cheap alternative sources of labor. However, while offshoring may directly displace domestic workers, the resulting foreign market access and lower production costs allow domestic firms to increase efficiency, expand production, and thus create new jobs for domestic workers. These new jobs often involve more complex tasks, as revealed by the positive relation between the share of offshored jobs and the average cognitive and interactive task content of domestic jobs.
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  • Effect of international activity on firm performance

    Trade liberalization benefits better performing firms and contributes to economic growth

    Joachim Wagner, May 2014
    There is evidence that better performing firms tend to enter international markets. Internationally active firms are larger, more productive, and pay higher wages than other firms in the same industry. Positive performance effects of engaging in international activity are found especially in firms from less advanced economies that interact with partners from more advanced economies. Lowering barriers to the international division of labor should be part of any pro-growth policy.
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  • Public-sector outsourcing

    The desirability of outsourcing the provision of public services depends on their characteristics and market conditions

    Panu Poutvaara, May 2014
    Outsourcing public provision of services tends to lower labor intensity and increase its efficiency. Costs are usually lower, but quality problems can affect services like health care and residential youth care. Consumer choice has stimulated innovation in education, but the picture is ambiguous for health care. Natural monopolies are unsuitable for outsourcing. Network services (public transportation) may be outsourced through public tenders. While some jobs may be lost in the short run, the long-term effects are generally positive for a wide variety of activities.
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