Canada – Labour productivity of a firm engaging in offshoring was 6.8% higher StatCan finds

Offshoring refers to the sourcing of intermediate inputs for domestic production abroad. Specifically, in this paper, offshoring refers to goods imported directly by manufacturers, including both intra- and inter-firm transactions across international borders. Excluded, because of data limitations, are goods imported through intermediaries as well as services. 

Firms engaging in offshoring are found to be more productive than those not engaging in offshoring. This result holds for those offshoring to either U.S. or to non-U.S. markets, but especially those offshoring to both locations simultaneously. On average, the labour productivity of a firm engaging in offshoring was 6.8% higher than a similar firm that did not offshore its intermediate inputs.

In addition, firms with higher offshoring intensity (measured by the share of inputs that are imported) are characterized by higher labour productivity levels. Multivariate analysis confirmed that these results hold even when firm characteristics, such as industry, nationality of ownership, exporter status, and being a multi-establishment firm, are taken into account.

While offshoring is found to have a positive relationship with productivity, this does not establish the direction of causality between offshoring and productivity.

The results indicate that offshoring intensity generates higher productivity, especially for offshoring to non-U.S. locations.

The results show that offshoring has a direct effect on industry productivity by raising average firm-level productivity. Firms engaging in offshoring thus become more competitive and may then expand their market shares at the expense of less productive firms. The last sections examines whether offshoring has an indirect effect on industry productivity, by encouraging the reallocation of resources from less to more productive firms. They find that a larger percentage of productivity growth comes from resource reallocation from the less to the more productive firms in industries that have more offshoring, especially for offshoring to non-U.S. locations.

Further work needs to be undertaken since the present analysis applies only to manufacturing and is based on a short time series. Additional research based on a longer time series as well as in other sectors and on the timing of offshoring would provide useful extensions.

Chosen excerpts by Job Market Monitor. Read the whole story at  Industry Productivity in the Manufacturing Sector: The Role of Offshoring.