Job-creating offshoring?

European business is internationalising its supply chain; European manufacturing employment is falling. The correlation – combined with a lively anecdotes of West European jobs being transferred to low-wage Central European nations – has given rise to a growing choir of anxious voices. Public opinion and politicians both worried that globalization would ship jobs abroad and domestic workers will suffer.

The term ‘hollowing out’ is not new. Kūdōka (hollowing-out due to offshoring) has been a concern in Japan since the mid-1980s. Since it has been going on so long in Japan, it is natural place to look to the Japanese data for the employment impact of this new form of manufacturing organisation.

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. Thus, the effect of foreign direct investment (FDI) on the home labour market is an empirical issue. This column examines the globalizing activities of Japanese firms, with a particular emphasis on East Asia.

From the mid-1980, East Asian firms began to 'unbundle' their manufacturing processes by slicing up the value-added chain, a trend that accelerated in the 1990s. This fragmentation of production processes across the region resulted in a massive increase in the vertical trade of parts and components. Japanese firms have been major players in these international production and distribution networks, especially in the manufacturing sectors. As these firms have expanded their manufacturing operations in labour-abundant neighbours such as China, some in Japan have shared the fears expressed in Europe and North America about the impact of firms investing abroad to take advantage of the large wage gap between developed and developing countries. In a new CEPR Policy Insight, we use extensive data on the behaviour of Japanese firms with and without operations abroad to assess whether offshoring is a boon or bane to domestic manufacturing.1

Japanese firms are major players in East Asian production and distributions networks, and the acceleration of Japanese investment in East Asia, especially in manufacturing, over the last decade has spurred fears that Japanese domestic production may be hollowed-out by offshoring. However, the data demonstrate complementarity between firm-level trade and FDI, suggesting an increasing unbundling of manufacturing processes across production and distribution networks in East Asia. Therefore, firms establishing affiliates abroad need not shrink their domestic activities, as these operations are often complementary to the rest of the value added chain.

Using comprehensive firm-level data, we examine the relationship between firms' offshoring of activities and their domestic operations. 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%. Unfortunately, the dataset does not permit analyses of the skill structure of labor that is directly employed. We so however clearly observe that Japanese firms intensifying operations in East Asia tend to retain domestic operation including employment, more successfully than other firms – particularly in the case of SMEs globalizing their activities. Indeed, we find that SMEs expand domestic operations while offshoring.

These findings provide evidence that fears of offshoring may be unwarranted. Increased globalisation of manufacturing processes does not necessarily imply a hollowing-out of domestic production, and in Japan's recent experience, firms that go abroad expand employment at home relative to non-globalisers. In East Asia, at least, there is evidence that domestic workers ought to welcome offshoring by their employers.

Ando, M. and F. Kimura (2007a), “Globalizing Corporate Activities and Their Domestic Impacts: Evidences from Japanese Firms,” September, Keio University mimeograph.

Ando, M. and F. Kimura (2007b), “Can offshoring create domestic jobs? Evidence from Japanese data,” CEPR Policy Insight, No. 16.

1 Our data come 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. For details since Ando, M. and F. Kimura (2007b).