What happens at home when low tech manufacturing jobs go offshore? A new paper looking at the French and Italian experience suggests the results can be positive. Written by Giorgio Barba Navaretti (Università di Milano), Davide Castellani (Università di Urbino) and Anne-Célia Disdier (INRA-INAPG and TEAM Université de Paris 1), the paper asks: How Does Investing in Cheap Labour Countries Affect Performance at Home? France and Italy (PDF). Here is the abstract:
Transferring low tech manufacturing jobs to cheap labour countries is often seen by part of the general public and policy makers as a step into the de-industrialisation of the European economies. However, several recent contributions have shown that the effects on home economies are rarely negative and often positive.
Our paper contributes to this literature by examining how outward investment to cheap labour countries affect home activities of a sample of French and Italian firms that turn multinational in the period analysed. The effects of these investment are also compared to the effects of outward investment to developed economies. The analysis is carried out by using propensity score matching in order to build an appropriate counterfactual of national firms. This provides the hypothetical benchmark of what would have happened to domestic activities if firms had not invested abroad.
We find no evidence of a negative effect of outward investment to cheap labour countries. In Italy they enhance the efficiency of home activities, with also positive long term effect on output and employment growth. Also for France we find a positive effect on productivity and the size of domestic activity, although not as robust and significant. Investment to developed economies from both countries have essentially scale effects but which do not trickle down on productivity at home.
There may be various productivity lags in offshoring. Typically, offshoring causes an obsolete industry to quickly become more productive, e.g. producing the same output with fewer or cheaper inputs. Moreover, eventually, cheaper imports or a stronger domestic currency (from trade) forces the obsolete industry to become even more productive. The freed-up resources from the obsolete industry will shift into an emerging industry. At first, firms in an emerging industry will utilized inputs inefficiently, e.g. because of start-up costs, creating a market, gaining market share, not enough qualified workers, etc. However, eventually, some (i.e. surviving) firms in emerging industries will become increasingly more productive. So, offshoring will cause firms in obsolete industries to become more productive faster than firms in emerging industries, and emerging industries will use resources less efficiently in the beginning than obsolete industries used at the end, before they were shifted.
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