Working Paper 05-11 - Productivity gains and spillovers from offshoring

Offshoring is generally believed to be productivity-enhancing and this belief is underpinned by economic theory. This article contributes to the growing literature that tests empirically whether offshoring does indeed help to improve productivity. Estimating the impact of materials and business services offshoring on productivity growth with industry-level data for Belgium over the period 1995-2004, we investigate this issue separately for manufacturing and market services. The results show that there is no productivity effect of materials offshoring, while business services offshoring leads to productivity gains especially in manufacturing. In addition, we look at the possibility of rent spillovers from offshoring. Productivity gains from offshoring in one industry may feed through to other industries that purchase its output for intermediate use if, due to offshoring, the user value exceeds the price of the output. The lack of evidence of such rent spillovers from either materials or business services offshoring in the data leads us to conclude that firms manage to internalise all efficiency gains from offshoring.