ABSTRACT
However, the question whether the international relocation of production determines a change in the skill intensity of jobs is still unanswered, both in theory and in the evidence. While traditional trade models based on the Hecksher-OlinSamuelson framework argue that the move of low-skill intensive stages of production abroad decreases the demand for the relatively less abundant factor at home, other studies predict a more ambiguous impact of international outsourcing on low-skilled workers in the source country, so that multiple outcomes may emerge (Arndt 1997; Glass and Saggi 2001(1); Jones and Kierzkowski 2001). For this purpose, the theoretical literature suggests that such an effect depends on which type of production or service activity is offshored, on the factor intensity of both the processes that remain in the home country and the ones that are relocated internationally (Kohler 2003; Egger and Egger 2003; Egger and Falkinger 2003), and, finally, on the sector in which offshoring occurs (Arndt 1997). Whether, and to what extent, production offshoring impacts the skill composition of a country’s workforce is a matter of empirical research. The empirical literature on the skill bias effects of international outsourcing can be divided into two main lines of research. A first set of studies takes multinational firms and FDI as the units of analysis, distinguishing between vertical and horizontal FDI (Markusen et al. 1996; Lipsey 2002). While the former is mainly driven by the will to exploit the differences in factors endowments and prices, and leads to a net decrease in domestic employment (Agarwal 1997; Braconier and Ekholm 2000; Mariotti et al. 2003), the latter is primarily driven by the will to replicate abroad the whole production process of the home country, with the aim of finding new markets and global opportunities and with the effect of increasing both the employment and the skill intensity of domestic jobs (Markusen et al. 1996; Blömstrom et al. 1997; Mariotti et al. 2003). However, if the literature generally agrees on the total employment effects of FDI, less explored is the issue of the effect of FDI on the skill composition of the workforce. The research question thus becomes: does investing in cheaplabour countries lead to a skill upgrading at home? Head and Ries (2002) try to answer by looking at Japanese multinationals in the period 1965-1990: their results point to a positive relationship between offshoring and the demand for skilled labour only if production relocation is directed to developing countries and only when the unit of analysis is the firm instead of the industry. Similarly, Hansson (2005) finds that production delocalization toward less developed countries contributes to the general increase in the average level of qualifications within Swedish multinationals. In contrast to these results, Slaughter (2000), looking at 32 US manufacturing industries in the 1980s, does not show clear results in favour of the positive relationship between FDI and the employment of skilled workers at home. For Italy, Barba Navaretti and Castellani (2004) and Castellani et al. (2006) find a skill upgrading effect of foreign investments by multinationals primarily due to the international relocation of low value-added segments of the production process that leads to a lower demand for low-skill labour at home. Using data on a sample of manufacturing firms over the period 1989-1997, Piva and
Vivarelli (2004), instead, do not find any significant effect of FDI on the skill composition of Italian employment, even if the nature of the data and of results does not exclude a priori any possible influence. A second group of studies, instead, takes an international production approach and considers offshoring as a form of international trade involving intermediate or unfinished goods and processes. According to Jones and Kierzkowski (2001), international fragmentation can be thought as a process of splitting up and spread of previously integrated stages of production over an international network of production sites. More specifically, ‘outsourcing’ refers to the relocation of jobs and processes to external providers regardless of their location, while ‘offshoring’ refers to the relocation of jobs and processes to any foreign country, without distinguishing whether the provider is external or affiliated with the firm.4 According to OECD (2007), the term offshoring designates two distinct situations: (i) production of goods or services partially or totally transferred abroad within the same group of firms, through foreign affiliates (offshore in-house sourcing); or (ii) the partial or total transfer of the production of goods or services abroad to a non-affiliated unit (offshore outsourcing).5 Table 9.1 summarizes all the outsourcing and offshoring options previously described. The evidence available from the international trade literature provides general support for the skill-biased nature of production relocation.6 Wood (1994), for instance, calculates that import competition determines a reduction in the demand for unskilled labour by 30 per cent in 1990. On the same line, Sachs and Shatz (1994) conclude that production internationalization exerts a double effect on overall labour composition: it is not only the cause of a general decrease in manufacturing but, together with technological change, is a determinant of the decline in the relative demand for low-skilled workers. Moreover, Feenstra and Hanson (1996) provide some evidence that, for the period 1972-1990, international outsourcing is responsible for a 30-50 per cent rise in the demand for skilled workers and, thus, for a rise in income inequality. For the UK, Anderton and Brenton (1999) estimate that, between 1970 and 1986, imports from low-wage countries determine a negative impact of about 40
Table 9.1 Production options for a firm
Location Internal production (in-house) External production (outsourcing)
Within the country (domestic)
Production within the firm and the country (domestic in-house)
Production outside the firm but within the country (domestic outsourcing)
Abroad (offshoring or cross-border)
Production within the group to which the firm belongs but abroad (by its own affiliates) (offshore in-house sourcing)
Production outside the firm and outside the country by non-affiliated firms (offshore outsourcing or subcontracting abroad).
