Offshore Outsourcing and Productivity

Offshoring of services, either to a foreign affiliate or an external overseas supplier, and its effects on developed economies is at the heart of policy discussion. Whilst macro evidence and case studies are not lacking, few studies have used microeconomic data to analyse this issue and they have only looked at the manufacturing sector. This study is the first to use establishment level data for both manufacturing and services sectors in the United Kingdom during the early 2000s to analyse the importance of offshoring and its relationship with firms’ performance. We find that firms that offshore services are mainly firms with international links, i.e. exporters of services and multinationals, both domestic and foreign. We find that offshorers are on average larger, more capital intensive, use more ICT capital and pay higher wages than firms, which do not offshore. We explore in more detail the relationship between offshoring and productivity. We find that, controlling for the other dimensions of global engagement, industrial affiliation, regional location, capital intensity and age, a 10% point increase in offshoring intensity is associated with a 0.37% increase in total factor productivity. The effect comes mainly from firms that are domestic and non-globally engaged, i.e. do not export and are not part of a multinational firm. Secondly, we find a productivity ranking of firms in line with previous empirical papers and theoretical trade models: multinationals are the most productive, followed by exporting firms. Finally, we do not find any robust evidence that the positive association of offshoring is driven by particular types of services or partner countries.