Outsourcing is defined here as the geographical split-up of a firm’s value chain over national boundaries. It incorporates the procurement of intermediate inputs from a foreign location via imports that either takes place within a firm (intra-firm) or outside the firm in the form of arm’s length transactions (inter-firm). Thus outsourcing may (optionally) be accompanied by vertical foreign direct investment. The intermediate inputs receive a value-added in the outsourced stage of the value chain. Subsequently, they require final assembly upon their return to the outsourcing entity. Therefore the phenomenon of outsourcing can be clearly separated from buying raw materials and trading final goods. The paper proceeds as follows: Section 2 relates the characteristics of outsourcing to trade theory. Different theoretical frameworks predicting the effects of outsourcing on factor-prices are presented along with their central assumptions. Additionally, they are put into perspective with regard to a conventional Heckscher-Ohlin framework. In section 3 the model-outcomes are confronted with reality by reviewing relevant empirical studies in the context of outsourcing to Eastern European countries. The findings of the previous sections are then - in section 4 - transformed into suggestions for the political agenda dealing with the labor market challenges resulting from a further EU integration. Section 5, finally, concludes on central insights of the paper and indicates directions for further research.
Table of Contents
1 Introduction
2 Theoretical framework for the prediction of outsourcing effects
2.1 Outsourcing as international trade in intermediate inputs
2.2 Effects of outsourcing in conventional trade theory: the Heckscher-Ohlin model
2.3 Characteristics of outsourcing to Eastern Europe and model assumptions
2.4 New trade models focusing on outsourcing
2.4.1 Feenstra and Hanson (1997)
2.4.2 Arndt (1997)
2.4.3 Kohler (2001)
2.5 Dilemma of theory in explaining outsourcing effects
3 Effects of outsourcing in an empirical perspective
3.1 Elements of an empirical analysis of outsourcing
3.2 Labor market trends in Western Europe since 1990
3.3 Magnitude and structure of outsourcing
3.4 Size and direction of outsourcing effects
3.5 Empirical links between outsourcing and the labor market
4 Policy Implications
5 Conclusion
Objectives and Core Topics
This paper investigates the labor market consequences of international outsourcing from Western European firms to Central and Eastern Europe. The primary research goal is to determine whether a statistically significant link exists between the procurement of intermediate inputs from Eastern European countries and the labor market performance—specifically regarding wages and employment—of Western European countries.
- Theoretical frameworks and the Heckscher-Ohlin model in the context of outsourcing
- New trade models, including contributions by Feenstra, Hanson, Arndt, and Kohler
- Empirical analysis of labor market trends in Western Europe since 1990
- Measurement methodologies for the magnitude and structure of outsourcing
- Review of empirical studies on outsourcing effects and policy recommendations
Excerpt from the Book
2.1 Outsourcing as international trade in intermediate inputs
Outsourcing can be associated with international trade in vertical fragments of value-chains. With the intention to reach a cost-efficient production disaggregated parts of a firm’s value chain are allocated to countries in which the specific operations are performed at the lowest costs while delivering the demanded quality. This allocation of production becomes necessary, as the required input factors are not tradable themselves. The production cost differentials between countries are related to technological factors (productivity) and differing factor endowments (factor proportions). Countries specialize in those fragments of the value-chain that correspond to their comparative advantages and import the corresponding intermediate inputs. However, it is important to distinguish trade related to outsourcing from traditional trade: While outsourcing induced trade deals with intermediate inputs and takes place within a certain sector (intra-industry trade) conventional trade is characterized by its focus on final goods, which are exchanged between sectors.
In the context of outsourcing to CEE countries it is – as a first conventional approach - assumed here that the receiving countries are relatively labor-abundant and that their workforce is comparatively low-skilled. Due to these endowments costs for low-skilled labor are relatively cheap in Eastern Europe. The more developed Western sending countries enjoy a relatively higher capital stock in combination with a more advanced level of technology, which is closely related to their relatively higher reservoir of high-skilled labor. Therefore Western firms outsource low-skilled labor-intensive production stages to Eastern Europe while carrying out more skill-intensive activities domestically.
Summary of Chapters
1 Introduction: This chapter provides an overview of EU integration, defines outsourcing as the geographical splitting of a value chain, and sets the scope for examining labor market impacts.
2 Theoretical framework for the prediction of outsourcing effects: This section explores how traditional and new trade models explain outsourcing and its potential influence on factor prices and labor demand.
3 Effects of outsourcing in an empirical perspective: This chapter reviews labor market trends and evaluates various empirical studies to determine if outsourcing significantly influences labor market outcomes.
4 Policy Implications: This chapter discusses potential political responses, emphasizing education and labor market flexibility over protectionism to support unskilled workers.
5 Conclusion: The final chapter summarizes the findings, noting that the effects of outsourcing are highly dependent on specific country and industry contexts and suggests directions for future research.
Keywords
Outsourcing, Labor Market, Western Europe, Central and Eastern Europe, Trade Theory, Heckscher-Ohlin Model, Intermediate Inputs, Labor Demand, Skill Intensity, Wage Gap, Empirical Analysis, Foreign Direct Investment, Policy Implications, Productivity, Fragmentation
Frequently Asked Questions
What is the primary focus of this research?
The paper primarily focuses on the economic and distributional consequences of outsourcing intermediate production stages from Western European firms to Central and Eastern European countries, with a special emphasis on labor market effects.
What are the core themes addressed in this work?
The core themes include trade theory (specifically Heckscher-Ohlin and new trade models), empirical measurement of outsourcing, labor market trends (wages and employment), and the political implications for managing labor market challenges.
What is the main research question?
The research seeks to answer whether there is a statistically significant, causal link between international outsourcing to Eastern Europe and the deteriorating labor market position of low-skilled workers in Western Europe.
Which scientific methodologies are utilized?
The paper employs a combination of theoretical model analysis (Heckscher-Ohlin, Feenstra/Hanson, Arndt, Kohler) and a review of existing empirical econometric studies that use industry-level and firm-level data.
What topics are covered in the main body?
The main body contrasts standard trade theory with new trade models, discusses the difficulties of measuring outsourcing, reviews empirical studies on wage and employment impacts in countries like Germany and Austria, and derives policy suggestions.
Which keywords best characterize this study?
Key terms include outsourcing, fragmentation, labor market, distributional effects, CEE countries, and human capital.
How do the theoretical findings compare to empirical evidence?
Theoretical models provide ambiguous results depending on their assumptions regarding labor mobility and factor intensity; consequently, the paper highlights that these theories are insufficient on their own and must be complemented by empirical analysis.
What is the author's stance on policy intervention?
The authors argue against protectionism, suggesting instead that governments should focus on managing the transition by improving educational systems and labor market flexibility to support affected low-skilled workers.
- Citation du texte
- Oliver Dachsel (Auteur), Frederik Drescher (Auteur), Maren Jäger (Auteur), 2006, The Impact of Outsourcing to Middle and Eastern Europe, Munich, GRIN Verlag, https://www.grin.com/document/56951
