Does Material and Service Offshoring Improve Domestic Productivity? Evidence from Japanese manufacturing industries

Author Name ITO Keiko  (Associate professor, School of economics, Senshu university) /TANAKA Kiyoyasu  (Research Assistant, RIETI/Institute of Economic Research COE, Hitotsubashi University)
Creation Date/NO. February 2010 10-E-010
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An increasing number of manufacturers are shifting some stages of the production process offshore. This study investigates the effects of offshoring on productivity in Japanese manufacturing industries for the period 1988-2004. Material offshoring, as measured by an import share of intermediate material inputs, has steadily increased during the period, with a pronounced increase in offshoring to Asian countries. In a wide range of specifications, we find significantly positive correlations between material offshoring and productivity at the industry level. The estimates are particularly robust for offshoring to Asia. These results suggest that Japanese manufacturing firms have developed an extensive international division of labor in East Asia, which in turn may have enhanced domestic productivity. In contrast, service offshoring, as measured by an import ratio of service inputs, is not associated with industry-level productivity. We find a positive correlation between offshoring and productivity only for information services, suggesting that in this segment, offshoring offers potential benefits.