O¤shoring, Multinationals and Labor Market: A Review of the Empirical Literature

This paper reviews the existing empirical literature on the e¤ects of o¤shoring and foreign activities of Multinational Enterprises (MNEs) on the labor markets of developed countries. Available results provide robust evidence in support of the fear that material o¤shoring worsens wage inequality between skilled and unskilled workers; on the contrary, results are still too ambiguous to support concerns that material o¤shoring raises the elasticity of unskilled labor demand and produces adverse short-run employment dynamics. Service o¤shoring does not reduce total labor demand signi…cantly and does not pose serious threats to human capital accumulation. Finally, MNEs tend to substitute domestic labor with foreign labor, but the relationship is weak; moreover, substitutability is mainly driven by horizontal, market-seeking, Foreign Direct Investments. Keywords: O¤shoring, Multinational Enterprises, Labor Market JEL codes: F16, F23, J31 Contacts: CESPRI Università Bocconi. Via Sarfatti 25, 20136 Milan (Italy). Email. [email protected] 1 1. Introduction and motivation During the last two decades, opponents to globalization have directed harsh protests against o¤shoring and foreign activities of domestic Multinational Enterprises (MNEs), arguing among other things that they may produce severe deterioration in the economic fortunes of employees in developed countries. Opposition exacerbated in the last few years, reaching its height at the onset of the 2004 U.S. presidential election (Amiti and Wei, 2005a; Mankiw and Swagel, 2006). The opposition, however, has been based on speci…c examples of …rms that have …red domestic employees or exposed them to wage cuts, after the decision to expand operations abroad. Similar experiences are de…nitely harsh from the perspective of the workers involved. Nonetheless, from the viewpoint of an economist, they do not probably su¢ ce to conclude that o¤shoring and MNEs are bad threats for the national economy and have to be impeded with the right policy interventions. Large evidence, in fact, suggests the existence of a positive link between o¤shoring and MNEs, on one hand, and productivity growth, on the other (Mann, 2003; Amiti and Wei, 2006; Olsen, 2006). By contrast, the labor market e¤ects of o¤shoring and MNEs activities could end up being small for the national economy, once accounting for the complete adjustment in a general equilibrium perspective. If this were so, the most e¤ective way of dealing with o¤shoring and foreign activities of MNEs would be to design appropriate wage insurance schemes and retraining programs for the a¤ected workers, rather than trying to restrict the access of …rms to these internationalization strategies. This would allow governments to spread more evenly the overall bene…ts of o¤shoring and MNEs activities across domestic workers. Based on this argument, this paper tries to draw some conclusions about the magnitude and nature of the labor market e¤ects of o¤shoring and MNEs, by reviewing the existing empirical literature focusing on developed countries. To clarify terminology, I will refer to o¤shoring as the practice through which …rms fragment their production processes and relocate some stages abroad, with the main aim of exploiting cross-country cost di¤erentials due to relative di¤erences in resource endowments1. I will specialize the de…nition to material o¤shoring when referring to foreign relocation of purely productive stages (like assembly or production of speci…c intermediate components). I will instead specialize the de…nition to service o¤shoring when referring to foreign relocation of service tasks (like call center operations, back o¢ ce activities, accounting, and the like). Turning to MNEs, I will often exploit the standard classi…cation based on the horizontal or vertical nature of Foreign Direct Investments (FDI): vertical FDI are meant to transfer stages of production abroad to exploit cost di¤erentials, whereas horizontal FDI are