2008/3 Research & Review
Offshore Outsourcing by Japanese Firms
Faculty Fellow, RIETI
It is well known that intensified international competition and the development of information and communication technologies (ICT) have impelled many multinational companies to perform a wide range of tasks across national boundaries. Today's global economy cannot be fully explained by industry-level factors. More refined arguments based on disaggregations to a firm, product, or even task level are needed. The accumulation of specific episodes reported by the media does not lead us to understanding of the full picture. In the United States, increasing outsourcing of software programming to India has provoked political reactions, stirring up vocal concerns that this poses a threat to domestic employment. The current state of offshore outsourcing must be evaluated in a more objective manner.
On the theoretical front of international economics, global sourcing decisions by firms have become a hotly researched topic, as in Antràs and Helpman (2004). In the 1970s-1980s, New Trade Theory explained intra-industry trade by for the first time incorporating the concept of imperfect competition into theoretical analysis of trade in full scale. The latest trend observed in a series of new studies (New New Trade Theory) focuses primarily on contract incompleteness to explain the heterogeneity of firms, even within the same industry, in their degree of globalization (e.g., whether or not to launch overseas operations). However, few empirical studies have been completed in Japan or in the United States and Europe to verify the validity of New New Trade Theory, due partly to the limited availability of microdata.
RIETI conducted a survey of corporate offshore activities, which I organized jointly with RIETI Research Counselor Ryuhei Wakasugi (concurrently professor at Kyoto University and adjunct professor at Keio University). Findings from this survey and our analysis were summarized in a RIETI discussion paper we co-authored with RIETI Visiting Scholar Banri Ito (Ito, Tomiura, and Wakasugi 2007) and presented at the international seminar, " Global Network and Outsourcing ," held in November 2007 in Tokyo. The seminar, organized by RIETI and the Center for Economic Policy Research (CEPR), was attended by CEPR Policy Director Richard Baldwin. I would like to introduce the key points of the findings.
In January 2007 we sent our questionnaire to a total of 14,062 firms, covering almost all large- or medium-sized firms in all manufacturing industries, and received responses from nearly 40% of them, a fairly high ratio as an academic survey. In consideration of the burden of answering, the questionnaire was arranged in such a way that respondents can answer simply by checking applicable boxes. Therefore the magnitude of outsourcing, whether in monetary terms or otherwise, was not measured.
The first noteworthy finding was that the number of firms outsourcing across national borders (offshore outsourcing) remains small. Among the large- or medium-sized firms that responded to the survey, only 21% are engaged in such outsourcing. Obviously, the ratio is far smaller for small-sized enterprises (Tomiura 2007). The Japanese economy, as a whole, appears to not yet be fully taking advantage of offshore outsourcing.
Second, China is the destination of Japanese firms' offshore outsourcing in the majority of cases. East Asia (China and ASEAN countries) is the destination for roughly three-fourths of offshore outsourcing by Japanese firms (Table 1). Outsourcing to "Other Asia," which includes India, along with the U.S. and Europe remains small in proportion.
|China||ASEAN||Other Asia||U.S. and Europe||Rest of the world||World total|
Notes: Shown are the percentages in the total number of foreign outsourcing (FO) cases. The outsourcing of the same category of tasks to the same type of suppliers in the same region is counted as one FO case even if multiple transactions are involved. "China" includes Hong Kong and Taiwan.
Third, the number of Japanese firms engaged in offshore outsourcing of service-related tasks remains extremely small (Table 1), though only manufacturing firms were covered by the survey.
Fourth, outsourcing to overseas subsidiaries accounts for nearly 40% of offshore outsourcing (Table 2). These cases are counted as "outsourcing" because an overseas subsidiary is a separate legal entity. In economic reality, however, outsourcing to own subsidiaries overseas is merely intra-firm trade of multinationals.
|Own subsidiaries||Other Japanese subsidiaries||Foreign-owned suppliers||Total|
Notes: "Foreign-owned suppliers" include local firms and subsidiaries of multinationals from third countries. "Subsidiaries" are defined by their majority ownership. See notes to Table 1.
The survey also asked about research and development (R&D) activities overseas and found that Japanese firms tend to integrate offshore R&D with the R&D at their headquarters in Japan.
Using these valuable microdata, we plan to deepen our analysis to test theoretical hypotheses drawing much attention at the frontier of economics.
Antràs, P., and E. Helpman (2004) "Global Sourcing," Journal of Political Economy vol. 112, no. 3, pp. 552-580.
Ito, B., E. Tomiura, and R. Wakasugi (2007) "Dissecting Offshore Outsourcing and R&D: A Survey of Japanese Manufacturing Firms," RIETI Discussion Paper 07-E-060.
Tomiura, E. (2007) "Foreign Outsourcing, Exporting, and FDI: A Productivity Comparison at the Firm Level," Journal of International Economics vol. 72, pp. 113-127.
March 31, 2007
Article(s) by this author
August 21, 2020［VoxEU Column］
March 31, 2020［VoxEU Column］
July 14, 2011［Column］
March 31, 2007［Keizai Sangyo Journal］
Is Our Economy Globalized? - The emergence of "New New Trade Theory" and needs for firm-level empirical analysis
October 31, 2006［Column］