Offshoring – that is in itself is not a new phenomenon – has recently gained a new dynamic through the decrease in transportation costs and dramatic
... [Show More] advances in information technology. This has facilitated further fragmentation of production processes as well as the relocation of production stages. Developing countries play an increasingly important role in this process. The inclusion of developing countries in “global production networks” enables multinational firms to profit from the generally lower labour costs in developing countries. It is this aspect that has led to fears in the industrialized countries that jobs previously held in the North will be “relocated” to developing and transition countries. Market research companies have fuelled these fears by presenting alarming headline statistics that predict massive job losses at the expense of workers in developed countries. Although offshoring is often blamed for lower job creation and downward wage pressure in advanced economies, a thorough examination of the literature leads to the conclusion that these fears are often greater than the actual threat. The literature has mainly focused on the impact of offshoring in developed countries, i.e. those countries that relocate tasks abroad. However, few attempts have been made to investigate the impact of this process in receiving countries in the developing world. The effect on the recipient economies could be more complex, since it induces the start-up of new activities and consequent externalities. Approaching “offshoring” from this perspective is often done under the label “inshoring”. This paper reviews some of the issues brought forward in the debate on offshoring. It defines the term clearly and draws the border between offshoring and related terms. The study also identifies the forces that drive offshoring, the tasks that are most susceptible to relocation, and the most likely destinations. A more technical section presents the tools and the available data to measure offshoring and its consequences. Special focus will be given to the impact of offshoring on employment and inequality, both in the countries that offshore and those that host offshored activities. Two broad conclusions emerge from the discussion: Firstly, for developing countries offshoring has the potential to generate employment, both in services and manufacturing. As far as those jobs correspond to good working conditions, offshoring represents a possibility to benefit from globalization and help countries in their development process and in the rise of formal jobs. Secondly, in developed countries, the employment impact has so far been rather limited in terms of net job gains or losses. However, offshoring has often predominantly affected unskilled workers and put pressure on their wages relative to those of skilled workers, thus contributing to greater wage inequality. Therefore, offshoring has an effect that is similar to that of technological change, exacerbating the later. Nevertheless, new offshoring trends, in particular in services, shows a rising offshoring of “higher skilled” activities. Briefly put, the further fragmentation of production processes has added to the division of labour around the world. This dynamic element of globalization leads to new opportunities of specialization, but also fiercer competition. The private sector is driving the process, but public policy may play an important role in grasping the benefits of offshoring through the design of “modern” industrial policies, FDI policies, as well as educational and skill development policies. [Show Less]