Growth gains from offshore outsourcing

Abstract

We contribute theoretically and empirically to the policy debate on the domestic impact of offshore outsourcing. First, within a simple Ricardian structure, we put forward a growth model where sourcing of foreign inputs by itself, without any transplanted channels, leads to higher growth of domestic industries. Second, by combining country-sector level panel data on production with data on sector level use of imported inputs and input tariffs, we estimate the impact of foreign outsourcing on productivity and output growth. In line with our theoretical model, our analysis confirms that foreign sourcing of inputs exerts a positive effect on growth whereas imported final goods turn out to be insignificant. This has important policy ramifications: removal of trade barriers on intermediate inputs is necessary to boost growth.