Offshoring and ICT – Evidence for German Manufacturing and Service Firms

Final goods and some services are nowadays often not only produced at one location but their value creation is organised within global value chains: Many firms source inputs, either intermediate goods or services, from abroad. The process of relocating parts of the production and value creation activities abroad is called offshoring. Modern information and communication technologies (ICT) are recognised to be a central driver behind the recent rise in firms’ offshoring activities because ICT have the potential to reduce the costs associated with offshoring, e.g. communication costs with suppliers. In particular, the Internet has made previously mostly non-tradeable services tradeable, even across international borders. Moreover, ICT facilitate the splitting up of production processes. Existing empirical evidence suggests that more ICTintensive firms are more likely to offshore inputs than less ICT-intensive firms.

In this paper, I analyse the relationship between sourcing inputs from abroad, i.e. offshoring, and a firm’s ICT use. Using firm-level data from Germany with detailed information on ICT use, I distinguish between manufacturing and service sector firms. The studied ICT measures cover complex enterprise resource software, e-commerce for ordering products or services from suppliers, investment in software, hardware and telecommunication as well as the share of employees working predominantly at the computer (PC) as a proxy for a firm’s ICT intensity.

The results show that firms using software to coordinate and to manage the supply chain are more likely to offshore than firms which do not use such software, particularly in manufacturing. For manufacturing firms, the share of employees working mainly at the PC is positively related to offshoring, too. For service firms, also the use of general enterprise resource planning software and of e-commerce over the Internet for ordering at suppliers makes offshoring more likely. Moreover, offshoring firms from both sectors tend to perform better than non-offshoring firms: Firms with a higher labour productivity and firms which have realised a product innovation are significantly more likely to offshore. Overall, the findings reveal a positive link between ICT and offshoring as well as a performance advantage of offshoring firms in comparison to non-offshoring firms which is stated in the literature.

Rasel, Fabienne (2012), Offshoring and ICT – Evidence for German Manufacturing and Service Firms, ZEW Discussion Paper No. 12-087, Mannheim.