Outsourcing and offshoring of business services: how important is ICT

1
Outsourcing and offshoring of business
serviceshow important is ICT?
Motivation ....... Model ......... Data ....
Results ..... Conclusions .

• Laura Abramovsky
• Rachel Griffith
• IFS and UCL

2
Motivation
Motivation ....... Model ......... Data ....
Results ..... Conclusions .

• European growth lags behind US, particularly in
  ICT using sectors
• Vertical disintegration
• Rapidly changing technology and increased
  competition favour smaller and more adaptable
  firms
• Increased trade in services
• ICT facilitates tradability of many services
• increased gains from specialisation
• Slow uptake of ICT in Europe
• Has this been important in holding back economic
  growth?

3
Motivation
Motivation ....... Model ......... Data ....
Results ..... Conclusions .

• Variation in outsourcing between industries
• Antras (2003), Grossman and Helpman (2002, 2005),
  Bartel, Lach and Sicherman (2004)
• Recent work emphasises within industry variation
  in outsourcing
• Baker and Hubbard (2002), Antras and Helpman
  (2004), Marin and Verdier (2005)
• What we do
• How important is ICT as determinant of
• outsourcing
• offshoring
• Use micro data to look within industry

4
What are outsourcing and offshoring?
Motivation ....... Model ......... Data ....
Results ..... Conclusions .
5
What are outsourcing and offshoring?
Motivation ....... Model ......... Data ....
Results ..... Conclusions .
6
What are outsourcing and offshoring?
Motivation ....... Model ......... Data ....
Results ..... Conclusions .
7
What are outsourcing and offshoring?
Motivation ....... Model ......... Data ....
Results ..... Conclusions .
8
Model
Motivation ....... Model ......... Data ....
Results ..... Conclusions .

• Estimate factor demand equation for outsourced
  services
• ICT affects relative price of in-house versus
  outsourced production
• transaction costs
• adjustment costs
• search costs
• standardisation

9
Production function
Motivation ....... Model ......... Data ....
Results ..... Conclusions .
Y output S intermediate services K capital L
labour M intermediate goods
S1 in-house services S2 purchased services
(outsourcing)
10
Factor demand equation
Motivation ....... Model ......... Data ....
Results ..... Conclusions .
E.g. with fixed proportions production function
and with we get
relative cost of producing service in-house
compared to purchasing on the market, a
function of ICT investment
11
Factor costs - the role of ICT
Motivation ....... Model ......... Data ....
Results ..... Conclusions .
i firm j purchasing industry
price of service produced inhouse
price of service bought in the market

• Transaction costs
• Search costs
• Adjustment cost
• Standardisation

12
Factor costs
Motivation ....... Model ......... Data ....
Results ..... Conclusions .
i firm j purchasing industry
e.g. specificity of service
13
Factor costs
Motivation ....... Model ......... Data ....
Results ..... Conclusions .
i firm j purchasing industry
relative factor costs
interested in how varies across industry
assume constant within industry, captured by
fixed effects
assume i.i.d.
14
Empirical model - outsourcing
Motivation ....... Model ......... Data ....
Results ..... Conclusions .
i firm j purchasing industry (broad)
k purchasing industry (narrow)
15
Empirical model - offshoring
Motivation ....... Model ......... Data ....
Results ..... Conclusions .

• Similarly, to look at offshoring we consider
• Derive factor demands, etc.
• Expect importance of ICT for search, transaction
  and adjustment costs higher for imports

where S2 can be either -imported
services -domestically outsourced services
16
Identification
Motivation ....... Model ......... Data ....
Results ..... Conclusions .

• What is driving variation in ICT intensity?
• here assume predetermined
• e.g. determined by production technology
• outsourced services (e.g. agency staff) decided
  with shorter time lag
• Current work exploring possible exogenous sources
  of variation in price of ICT
• UK tax credit for investment in ICT by small
  firms
• regional variation in introduction of broadband

17
Data
Motivation ....... Model ......... Data ....
Results ..... Conclusions .

• Ownership structure and output
• Purchases of business services
• ICT intensity

18
Data
Motivation ....... Model ......... Data ....
Results ..... Conclusions .

• UK Annual Census of Production (ARD-ABI)
• Establishment level (firm line of business)
• ownership structure of all plants in UK
• we use private sector (exclude govt. owned)
• legal obligation to reply
• for years 2000 and 2001
• information on purchased services for random
  stratified sample, 38,189 establishments

19
Data
Motivation ....... Model ......... Data ....
Results ..... Conclusions .

• Purchases of business services (whole economy)
• Goods and materials 45
• Employment costs 35
• Services 20
• varies substantially between and within
  industries
• Outsourcing and offshoring of all services

20
Data
Motivation ....... Model ......... Data ....
Results ..... Conclusions .

• ICT intensity
• purchase of software and work on software
  development by own staff
• scaled by output
• varies more within industry than between industry

21
Whole economy results domestic outsourcing and
offshoring
Motivation ....... Model ......... Data ....
Results ... Conclusions .
Dependent variable ln(service/output)
Robust standard errors in brackets
22
Elasticity of domestic and imported services
Motivation ....... Model ......... Data ....
Results ... Conclusions .
23
Economic significance
Motivation ....... Model ......... Data ....
Results Conclusions .

• Investment in ICT in US is about twice that of UK
• If UK increased to US levels would see
• increase in domestic outsourcing of up to 15 in
  some industries
• increase in offshoring of up to 60 in some
  industries

24
Further work
Motivation ....... Model ......... Data ....
Results ..... Conclusions .

• Richer model
• Determinants of ICT intensity
• Consider other services
• Distinguish multinationals from non-multinational
  firms
• Other firm level covariates
• Host of measurement issues