Does Material and Service Offshoring Improve Domestic Productivity? Evidence from Japanese...

8/12/2019 Does Material and Service Offshoring Improve Domestic Productivity? Evidence from Japanese manufacturing industries

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Keiko Ito (Senshu University)Kiyoyasu Tanaka (Institute of Developing Economies)

WIOD Conference on Industry Level Analyses ofGlobalization and its Consequences

Technische Universitaet Wien, ViennaMay 26-28, 2010

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Does Material and Service Offshoring ImproveDomestic Productivity?

Evidence from Japanese manufacturingindustries


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Motivation

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Progress in fragmentation of productionprocesses and the international division of laborin East Asia

Increase in offshoring to Asia contributed to skill-upgrading in Japan (Ahn et al. 2008, etc.)

Statistical evidence so far that offshoring

enhances productivity is still weak

Particularly, on the effects of service offshoring,empirical evidence is scarce


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Definition of offshoring

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Olsen (2006)Offshoring refers to :

Relocation of jobs and processes to anyforeign country without distinguishing whether

the provider is external or affiliates with the firm

International outsourcing: relocation of businessactivities to unaffiliated foreign firms

+International insourcing : relocation of business

activities to affiliated foreign firms


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The purpose of this study

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Utilizing the comprehensive I-O Tables, relativelydetailed industry-level data, and trade statistics,we measure the size of offshoring of materialinputs and services inputs, and examine the trendand characteristics of offshoring for Japanese

manufacturingUsing industry-level data, we investigate theimpact of offshoring on domestic productivity forthe case of Japanese manufacturing

Test for the presence of productivity-enhancingeffects for both material offshoring and serviceoffshoringExamine how the effects differ for offshoring to

different regions and of different activities


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o en a mpac s o o s or ng onproductivity

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By relocating inefficient tasks to low-cost

countries, the unit cost of the firms product falls (=cost savings)By offshoring less productive stages ofproduction process, firms can shift corporate

resource to high-productivity activities (productdevelopment, process innovation, etc.)(=restructuring)The use of new varieties of imported material or

service inputs may increase productivity (=varietyeffect)

Technological innovations (ICT, transportation),

erosion of trade barriers


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studies)

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Grg & Hanley (2005): Irish electronics firms (1990-95)

Material offshoring (+) only for plants with low expintensities

Service offshoring (0)

Grg, Hanley & Strobl (2008): Irish mfgService offshoring (++) only for exporters-- service offshoring requires knowledge to search for

partners

Hijzen, Inui & Todo (2006): Japanese mfg (1994-2000)

Offshoring (+) 4x greater effect than domesticoutsourcing

Fari as & Mart n-Marcos (2008): Spanish mfg (1990-2002)


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Unclear effects of service offshoring

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McKinsey Global Institute (2005, 2008)

US service offshoring to India + on US economyGermany & France -tive

Daveri & Jona-Lasinio (2008)- transitional adjustment costs? ( low re-employment

rates, less flexible labor mkt, low job creation)- most productive services are offshored to escape existing

inefficiencies at home? ( insufficient liberalization)

Lin & Ma (2008): language barriersMGI (2005) : wage levels of destination countries,competitiveness of the home country, ownershipstructure of affiliated offshore providers


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Measurement of offshoring

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Offshoring =(imported intermediate inputs from all

industries) / (total non-energy intermediate inputs)

Material offshoring: z=MO (j=mfg. industries)Service offshoring: z=SO (j=offshorable services)

- telecommunications, insurance, finance,business services, information servicesData: 1990, 1995, 2000 I-O tables (benchmark)

Trade statistics (MOF, Japan), METI extended I-OTables, BOP statistics, JIP database 2009

i

N

j ij

i Y

m z

1 N

j i

j

j

iji Y

IM

IM

m z

1


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Estimation model

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Production function

Regression Model

Include industry dummies & year dummies

Include one-year lags of offshoring variablesEndogeneity --- Use Value added per worker as adependent variableData for S, M, L, K --- JIP Database 2009, 1988-2004

t it it it it it it i K L M S F MOSOT Q ,,,,,,, ,,,,t it it it it it it it it i e LnK LnL LnM LnS MOSO LnQ ,,4,3,2,1,2,10,

t it t ii

t it it it it it it i LnK LnL LnM LnS MOSO LnQ

,

,4,3,2,1,2,10,


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Table 3. OLS estimates of the effect ofoffshoring on TFP (1)

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Dependent variable: ln (Real Output)(1) (2) (3) (4)

-0.58 -0.588 -0.588(1.627) (1.511) (1.497)

0.387 0.374 0.31(1.071) (0.706) (0.753)

0.408* 0.445* 0.380*(0.198) (0.183) (0.152)

0.35 0.258 0.207(0.296) (0.230) (0.191)

0.542*** 0.518*** 0.544*** 0.542***(0.048) (0.045) (0.050) (0.050)

0.07 0.068* 0.071* 0.075*(0.036) (0.029) (0.035) (0.035)

0.084 0.072 0.074(0.057) (0.055) (0.065)

0.159(0.130)-0.079

(0.131)0.262* 0.279* 0.267* 0.267*(0.105) (0.105) (0.109) (0.109)

Year Dummies yes yes yes yesIndustry Dummies no no no noObservations 800 800 750 750R-squared 0.641 0.621 0.635 0.637

ln(Number of Workers)

ln(Number of Production Workers)

Service Offshoring

Service Offshoring, t-1

ln(Material Input)

ln(Service Input)

ln(Capital Stock)

Material Offshoring

Material Offshoring, t-1

ln(Number of NonproductionWorkers


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Table 3. OLS estimates of the effect ofoffshoring on TFP (2)

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Dependent variable: ln (Real Output)(5) (6) (7) (8)

-0.613 -0.635 -0.658(1.716) (1.603) (1.604)

0.268 0.136 0.095(1.066) (0.674) (0.691)

0.151 0.19 0.175(0.132) (0.130) (0.129)

0.139 0.101 0.092(0.193) (0.171) (0.163)

0.479*** 0.467*** 0.484*** 0.486***(0.049) (0.046) (0.052) (0.052)0.062 0.061* 0.062 0.063

(0.032) (0.029) (0.033) (0.033)0.104 0.109 0.09

(0.057) (0.055) (0.068)0.103

(0.136)-0.012(0.133)

0.124* 0.142** 0.152** 0.149*(0.055) (0.050) (0.056) (0.057)

Year Dummies yes yes yes yesIndustry Dummies yes yes yes yesObservations 800 800 750 750R-squared 0.700 0.688 0.693 0.693


ln(Number of Production Workers)

Service Offshoring

Service Offshoring, t-1

ln(Material Input)

ln(Service Input)

ln(Capital Stock)

Material Offshoring

Material Offshoring, t-1

ln(Number of Nonproduction

Workers


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Robustness checks

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Labor productivity (VA per worker) specificationMaterial offshoring +tive & significant (Table 4)

TFP growth specificationMaterial offshoring +tive & significant

Additional controls (Table)

Material offshoring: +tively associated with domestic

productivityService offshoring: insignificant


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Table 5. OLS estimates of the effect ofmaterial offshoring to Asia on TFP

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Dependent variable: ln (Real Output)

(1) (2) (3) (4) (5) (6) (7) (8)-0.638 -0.481 -0.489 -0.637 -0.565 -0.575(1.649) (1.528) (1.523) (1.720) (1.613) (1.615)

0.304 0.034 0.031 0.232 -0.027 -0.037(1.033) (0.674) (0.691) (1.048) (0.652) (0.652)

1.037** 1.015*** 0.966** 0.466* 0.622* 0.606*(0.303) (0.220) (0.288) (0.225) (0.234) (0.287)

1.242* 0.963** 0.915** 0.728 0.690* 0.675*(0.547) (0.356) (0.310) (0.425) (0.337) (0.320)

0.536*** 0.509*** 0.530*** 0.530*** 0.480*** 0.465*** 0.484*** 0.484**(0.045) (0.044) (0.046) (0.046) (0.047) (0.045) (0.049) (0.048)0.071* 0.074** 0.077* 0.078* 0.063 0.064* 0.066* 0.067*(0.035) (0.027) (0.032) (0.032) (0.032) (0.028) (0.031) (0.031)

0.091 0.091 0.094 0.105 0.116* 0.098(0.061) (0.051) (0.067) (0.060) (0.053) (0.069)0.258* 0.268* 0.260* 0.261* 0.127* 0.141** 0.156** 0.154**(0.104) (0.102) (0.105) (0.105) (0.055) (0.049) (0.056) (0.055)

Year Dummies yes yes yes yes yes yes yes yesIndustry Dummies no no no no yes yes yes yesObservations 800 800 750 750 800 800 750 750

R-squared 0.641 0.621 0.635 0.637 0.7 0.688 0.693 0.693

Material Offshoring to Asia

Material Offshoring to Asia,t-1


ln(Capital Stock)

ln(Material Input)

ln(Service Input)

Service Offshoring

Service Offshoring,t-1


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Table 6. OLS estimates of the effect ofinformation services offshoring on TFP

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Dependent variable: ln (Real Output)

(1) (2) (3) (4) (5) (6) (7) (8)10.75 48.84 43.99 -0.341 65.72 65.40

(21.480) (27.71) (32.42) (24.46) (43.04) (47.45)82.62** 116.4** 108.5** 84.85** 146.5** 145.9*(24.36) (33.40) (37.80) (25.02) (49.01) (55.44)

0.409* 0.377* 0.343* 0.152 0.13 0.129(0.197) (0.164) (0.144) (0.132) (0.124) (0.126)

0.347 0.204 0.178 0.148 0.056 0.055(0.285) (0.213) (0.184) (0.186) (0.160) (0.155)

0.542*** 0.517*** 0.542*** 0.541*** 0.480*** 0.465*** 0.482*** 0.482**(0.049) (0.044) (0.050) (0.050) (0.049) (0.045) (0.052) (0.052)0.071 0.068* 0.074* 0.076* 0.063 0.061* 0.066 0.066

(0.036) (0.030) (0.036) (0.036) (0.032) (0.030) (0.034) (0.034)

0.084 0.07 0.071 0.105 0.105 0.082(0.057) (0.057) (0.068) (0.057) (0.057) (0.072)0.261* 0.272* 0.258* 0.259* 0.124* 0.130* 0.135* 0.135*(0.105) (0.107) (0.112) (0.111) (0.055) (0.052) (0.062) (0.061)

Year Dummies yes yes yes yes yes yes yes yesIndustry Dummies no no no no yes yes yes yesObservations 800 800 750 750 800 800 750 750R-squared 0.641 0.621 0.635 0.637 0.700 0.688 0.693 0.693

ln(Capital Stock)

ln(Material Input)

ln(Service Input)


Information ServicesOffshorin Information ServicesOffshorin , -

Material Offshoring

Material Offshoring,t-1


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Summary of the results

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Material offshoring: +tively associated with domesticproductivityService offshoring overall: insignificant

Material offshoring to Asia : +tive & significantMaterial offshoring to NA & EUR: insignificant

Characteristics of destination country do matterOffshoring to low-cost region brings greater productivity

gains

Information service offshoring: +tive & significantBusiness service offshoring: insignificant


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Effect of service offshoring onproductivity

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Business services involve a substantial amount of judgment & communication b/w clients &professionals

These tasks need to be standardized & reorganizedin order for foreign firms to provide them from adistance

Peculiarities of Japanese language & businessculture may be a barrier


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Conclusion

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Material offshoring has a positive effect on productivity

while service offshoring does not. (in line with previousresults of Italy & Korea, but at odds with results of U.S.)Although the level of service offshoring is still low, increasein info service offshoring would improve productivity.However, it has been pointed out that the corporate

organization of Jpn firms is not well suited to standardizedIT systems. (decision-making processes require substantialinterdivisional comm. ) (Motohashi 2008)Firms which restructure their IT management method wouldbe able to benefit from offshoring of services.

Material offshoring to Asia has a positive effect onproductivity. The large differences b/w factor prices at home& Asian countries, coupled with geographic proximity,appears to have yielded a productivity-enhancing effect.


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Future research

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Peculiarities of the Japanese business practice or

peculiarities of the Japanese langugage & culture?examine effects of international outsourcing anddomestic outsourcing of business services

Effects of offshoring on various types of workers (low-

skilled or high-skilled workers)

Productivity effect of service offshoring by region


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Thank you!

Does Material and Service Offshoring Improve Domestic Productivity? Evidence from Japanese...

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