The Economics of Offshoring

Abstract

This paper examines the various economic issues on offshoring (international outsourcing). It begins with a discussion of the factors that determine a firm's decision to offshore and illustrates, with simple models, the cost saving of offshoring certain stages of production and the advantages of specializing in some input production and engaging in other input trade. The paper then examines the recent trend in offshoring with emphasis on the rise of IT offshoring and also the characteristics of firms in relation to offshoring and exporting. The effect of offshoring and national welfare is then discussed in light of numerous results in recent empirical studies. After examining the current U.S. programs to help the displaced workers, the paper concludes with the various short-run and long-run policy proposals to solve the growing public concern and vexation on offshoring.

Keywords: offshoring, outsourcing, fragmentation, gains from offshoring, input trade and specialization, IT offshoring, economic welfare, U.S. policies, reform proposals

JEL Classification: A10, D21, D22, D63, F16, J28