Production fragmentation and outsourcing: the impact of trade and investment liberalization WITADA ANUKOONWATTAKA AND SISIRA JAYASURIYA

Increasingly firms purchase many intermediate inputs (components) both from other firms and from subsidiaries located in other countries. Such outsourcing across firm and national borders has shown rapid growth in Asia in recent years; in East Asia intermediate-product trade increased by 30 per cent between 2000 and 2003, and 40 per cent of ASEAN-4 exports depend on intra-regional vertical specialization (Athukorala and Yamashita 2006). This is not confined to manufacturing; with falling transport and communication costs, numerous services have become tradeable allowing similar product fragmentation in services. Outsourcing of services by US firms expanded at an annual rate of 6.3 per cent between 1992 and 2000 (Amiti and Wei 2006).1