The terms foreign outsourcing or offshoring apply when the components of a good or service are produced in several countries. The term offshoring often refers to a company moving some of its operations overseas, but retaining ownership of those operations. Intel, for example, produces microchips in China and Costa Rica using subsidiaries that it owns, so these production activities have moved offshore. In contrast, outsourcing refers to moving activities outside of a firm (which could be to another firm in the same country, as with domestic outsourcing, or to another firm in another country, as with foreign outsourcing). Mattel, for example, arranges for the production of the Barbie doll in several different countries, so it is engaged in foreign outsourcing. Unlike Intel, however,Mattel does not actually own the firms in those countries. In this entry we will not be concerned with the distinction between foreign outsourcing or offshoring, and use either term to refer to shifting activities to another country.
While there are historical examples of companies doing some of their production in another country, outsourcing is generally thought to be a feature of the modern world economy made possible by improvements in international trade, transportation, and communication. Indeed, the earliest known use of the word outsourcing in a published source is from anAmerican auto executive in the Journal of the Royal Society of Arts, 1979, who wrote: ‘‘We are so short of professional engineers in the motor industry that we are having to outsource design work to Germany’’ (Safire 2004). This example shows that outsourcing may involve the shifting of service activities (like design work) overseas, in addition to the shifting of production activities (like making the Barbie doll) overseas. In this entry we first concentrate on the shifting of production activities to other countries and then discuss service outsourcing.
See also fragmentation; internalization theory; trade and wages
- Amiti, Mary, and Shang Jin Wei. 2006. ‘‘Service Off shoring and Productivity: Evidence from the United States.’’ NBERWorking Paper No. 11926. Cambridge, MA: National Bureau of Economic Research. Estimates the impact of service outsourcing from the manufac turing sector on wages and productivity in the United States.
- Bernard, Andrew B., and J. Bradford Jensen. 2000. ‘‘Un derstanding Increasing and Decreasing Wage Inequal ity.’’ In The Impact of International Trade on Wages, edited by Robert Feenstra. Chicago: University of Chi cago Press, 227 61. Examines the regional variation in wage inequality in the United States.
- Bernard, Andrew B., J. Bradford Jensen, and Peter K. Schott. 2006. ‘‘Trade Costs, Firms, and Productivity.’’ Journal of Monetary Economics 53 (5): 917 37. Ex amines the impact of falling trade costs on firm entry, exit, and productivity.
- Campa, Jose, and Linda Goldberg. 1997. ‘‘The Evolving External Orientation of Manufacturing Industries: Evidence from Four Countries.’’NBERWorking Paper No. 5919. Cambridge, MA: National Bureau of Eco nomic Research; Economic Policy Review, The Federal Reserve Bank of New York (July). Presents evidence on the amount of outsourcing for four industrial countries: Canada, Japan, the United Kingdom, and the United States.
- Feenstra, Robert C., and Gordon H. Hanson. 1996. ‘‘For eign Investment, Outsourcing, and Relative Wages.’’ In The Political Economy of Trade Policy: Papers in Honor of Jagdish Bhagwati, edited by R. C. Feenstra, G. M. Grossman, and D. A. Irwin. Cambridge, MA: MIT Press, 89 127. Presents a model of outsourcing and some preliminary empirical results. .
- 1999. ‘‘The Impact of Outsourcing and High Technology Capital on Wages: Estimates for the U.S., 1979 1990.’’ Quarterly Journal of Economics 114 (3) (August): 907 40. Estimates the impact of outsourcing and computer use on wages in U.S. manufacturing.
- . 2004. ‘‘Intermediaries in Entrepoˆt Trade: Hong Kong Re Exports of Chinese Goods.’’ Journal of Eco nomics and Management Strategy 13 (1) (spring): 3 35. Discusses Chinese processing trade and intermediation by Hong Kong.
- Go¨rg, Holger. 2000. ‘‘Fragmentation and Trade: U.S. In ward Processing Trade in the EU.’’ Weltwirtschaftliches Archiv (Review of World Economics): 136: 403 22. Dis cusses processing trade between the United States and Europe.
- Grossman, Gene, and Esteban Rossi Hansberg. 2006. ‘‘Trading Tasks: A Simple Model of Outsourcing.’’ NBER Working Paper No. 12721. Cambridge, MA: National Bureau of Economic Research. A theoretical exposition of outsourcing in a two sector model.
- Jensen, J. Bradford, and Lori Kletzer. 2006. ‘‘Tradable Services: Understanding the Scope and Impact of Ser vices Offshoring.’’ In Offshoring White Collar Work Issues and Implications, edited by Lael Brainard and Susan M. Collins (Washington, DC: Brookings In stitute Trade Forum 2005), 75 134. Examines out sourcing from the service sector of the United States.
- Safire, William. 2004. ‘‘On Language.’’ New York Times Magazine (March 21), 30. Discusses the earliest known use of the word outsourcing in a published source.
ROBERT C. FEENSTRA AND J . BRADFORD JENSEN