Make or buy : offshoring of services functions in manufacturing

Abstract

About 40% of employment in manufacturing is in services functions. This paper develops a measure of narrow outsourcing, matching services functions performed by workers inside manufacturing firms to the same services functions provided by outside suppliers. Narrow outsourcing is entered into labour demand functions where labour is broken down on business functions using OECD data combined with the 2016 releases of the World Input Output Database (WIOD). The impact of narrow offshoring on manufacturing labour demand is small on average but depends strongly on the complexity of the value chain, the policy environment and technology. Manufacturing employment is more services intensive the longer the value chain. In-house IT functions complement and support offshored IT functions, while offshored R&D functions tend to replace in-house R&D. The results are largely driven by ICT mature manufacturing sectors.