Offshore Outsourcing Decision and Capital Intensity: Firm‐level Relationships

Abstract

In offshore sourcing, a firm chooses outsourcing to independent suppliers or insourcing from own foreign direct investment (FDI) subsidiaries. Based on the firmlevel data on offshore make-or-buy decision covering all manufacturing industries, this paper compares averages, documents inter-firm distributions, and estimates multinomial logit models of the firm's sourcing mode choice. As predicted by previous theoretical models, this paper directly confirms at the firm level that outsourcing firms tend to be substantially labor-intensive compared with firms in-sourcing from the same region, even after the firm's R&D intensity, firm size, or industry is controlled for. (JEL F23, L23, L24, L14)

Labor Markets and Multinational Enterprises in Puerto Rico

“…It is more likely that labor intensive fi rms select outsourcing relative to in-sourcing (Tomiura et al 2011 ). On the other hand, offshore outsourcing is often considered the root cause of job losses, plant closures, loss of synergetic advantages, loss of innovation capacity, loss of intellectual property, and high dependence on external companies (Mohiuddin et al 2010 ).…”

FDI and Outsourcing in a Service Industry: Welfare Effects of Liberalising Trade and Investment

“…Jabbour (2010), for example, finds that outsourcing firms are more efficient than vertical integrated (FDI) firms because outsourcing firms might concentrate on core activities and reduce organisational cost. Tomiura et al (2011) conclude that outsourcing (vertical integrated) firms provide incentives to supply a labour-(capital-) intensive good by sharing labour (investment) cost. Markusen (1997Markusen ( , 2002 notes that liberalising trade and investment at the same time is very different from applying each policy separately.…”

“…Tomiura et al . () conclude that outsourcing (vertical integrated) firms provide incentives to supply a labour‐ (capital‐) intensive good by sharing labour (investment) cost.…”

Empirical analyses of offshoring based on Japanese firm-level data:A survey

“…Ito and Fukao (2010), also based on firm level data of SOBA during 1989 to 2002, find that the local procurement ratio is positively related with the profitability of a Japanese affiliate 11) Tomiura et al (2011) also report that the capital intensity substantially varies across firms even within the same industry. The mean capital intensity ranking of industries matches with our prior, but relatively capital -intensive firms in labor -intensive industries are often more capital -intensive than relatively labor -intensive firms in capital -intensive industries, showing the critical importance of intra -industry firm heterogeneity in capital -labor ratio.…”

“…To directly test this theoretical prediction at the firm level, Tomiura et al (2011) 10) In this survey, the "outsourcing" is defined as contracting -out (gaichu or itaku, in Japanese) based on explicit contracts specifying specs or other dimensions of the outsourced tasks. The main advantages of this RIETI survey are the disaggregation of offshoring destination (China, ASEAN, other Asian countries, developed countries and the rest of the world) and the disaggregation of types of suppliers in offshoring (own majority -owned offshore subsidiaries, subsidiaries with majority ownership by other Japanese multinationals, and other foreign firms), while only large -or medium -sized firms in manufacturing industries are covered.…”