A rigorous approach to business services offshoring and North–North trade

ABSTRACT

Advances in information and communication technologies (ICTs) have gained economy-wide importance and raised concerns that even within North–North trade neither services nor high-skilled labour may be sheltered from international competition. Rather, both may be increasingly susceptible to offshoring. We present a novel theoretical framework for analysing offshoring with a focus on skilled labour in managing value-added chains. Thoroughly modelling demand and supply allows to explicitly track cause and effects. Accordingly, effects of business service offshoring are completely different and more diverse than those of material offshoring, with the effects inter alia depending on whether triggered by trade integration or ICT.

KEYWORDS:

• International trade
• global value chains
• service links
• business services
• high-skilled labour

JEL CLASSIFICATION:

• F16
• F12
• L89
• J31

Notes

¹ That is, services (with the exception of government services) on a balance of payments basis.

² We follow the convention established since UNCTAD (2004, p. 148) that defines offshoring as imports of (intermediate) producer services, regardless of whether they are produced at ‘arm’s length’ (international outsourcing) or in-house but abroad (i.e., captive offshoring or vertical foreign direct investment).

³ See Stigler (1951) and Chaney and Ossa (2013) for a more general account and, especially on the international dimension with a focus on services and tasks eliciting the most recent discussion Grossman and Rossi-Hansberg (2008).

⁴ On the (empirical) importance of distinguishing these two activities, see Francois and Woerz (2008). See also the work by Benz and Kohler (2014) and Wright (2014), whose approach, however, is completely distinct from ours in the sense that they consider them as conducted by two completely different types of labour (i.e. managerial and production workers).

⁵ Unlike Spencer (2005), Antràs (2014), and the literature on principal-agent and industrial-organization aspects in production at arm’s length, we abstract from those issues to concentrate on how the different engines in North–North trade are relevant for one symptom (co-movement) dominating the other (substitution) and the peculiarities of service offshoring.

⁶ Tobal’s (2012) model is a partial equilibrium model since it only models explicitly the home country. See also note 7.

⁷ As pointed out by Markusen and Strand (2008), who offer a numerical simulation, this is by no means an easy task. Liu and Trefler (2014), from the very start, thus focus on partial equilibrium with respect to trade.

⁸ We assume that labour markets are completely segmented by skill level.

⁹ To avoid corner solutions, we impose a priori limits on productivity parameters, such that $1>\alpha +2\beta$.

¹⁰ More precisely, the effect switches sign at H_n+1 = e^{−(2δ−1)/δ (δ−1)}, that is, for instance at δ = .5; H_n+1 = 1 or any combination described by the relation.

¹¹ An Appendix containing details in solving the model is available upon request from the authors.

¹² Ratios of trade to GNP increase at Home and in Foreign: because Home’s imports are Foreign’s exports, the trade flows are the same, except for the sign. Hence, in terms of absolute values, the numerator is the same in any case; differences lie in the denominator only, which can be reduced to $\overline{H}$ versus ${\overline{H}}^{\ast }$.