Offshoring and Firm Overlap

Transcription

1 Offshoring and Firm Overlap Stella Capuano (a), Hartmut Egger (b,c), Michael Koch (b), and Hans-Jörg Schmerer (a,c,d) (a) Institute for Employment Research (IAB), Nuremberg (b) University of Bayreuth (c) CESifo (d) FernUniversität Hagen University of Uppsala research seminar 05/05/15

2 Motivation Offshoring features prominently in the public debate as well as the scientific research on international trade Recent contributions focus on the role of firm heterogeneity: Antràs and Helpman (2004) Antràs, Garicano and Rossi-Hansberg (2006) Egger, Kreickemeier and Wrona (2013) In heterogeneous firms models à la Melitz (2003) with fixed offshoring costs: Firms self-select into offshoring Direct link between firm size and offshoring status But considerable overlap in the data: firms with the same size (or productivity) have different offshoring intensities

3 Motivation Share of firms >680 Firm size (categories) Non offshoring Offshoring Share of firms >24 Nr. tasks (categories) Non offshoring Offshoring

4 Motivation Table: Firm size and offshoring Size (IAB) No Yes > Total Table: Nr. of tasks and offshoring Nr. tasks No Yes > Total

5 Motivation Stylized facts show: subset of firms of each category engages in offshoring share increases in firm size/number of tasks In Melitz-type models overlap requires the draw of two (dependent) random variables (Davis and Harrigan, 2011; Harrigan and Reshef, forthcoming) So far missing: clean microfoundation of overlap

6 This paper Theory Tractable model of offshoring and firm overlap New microfoundation: firms differ in the range of tasks they perform, and in the share of offshorable tasks = Probability of offshoring increases in the number of tasks Empirics Model-based estimation of key parameters Quantifying the welfare effects of offshoring Conducting counterfactual analysis

7 The model Basic assumptions 2 countries, L (developed, source) and L (undeveloped, host) Consumers in both countries have identical CES preferences Monopolistic competition among single-product firms Production requires performance of different tasks, combined into a Cobb-Douglas technology q = z [ 1 z ] 1 z exp ln x(i)di, (1) z 0 x(i) output for task i, which equals labor input z (0, 1) firm-specific number of tasks

8 The model Cost minimization Two modes of production: c d = (1 z)w, if all tasks are performed at home c o = (1 z)wκ s, if share s is performed offshore Where: κ τw /w is the effective wage differential Offshoring only attractive if κ < 1 1/κ s is the marginal cost saving effect of offshoring

9 The model Firm entry Entering requires an initial investment of f e units of labor Investment gives single draw from a lottery Outcome is a technology tuple (z, s) z: number of tasks, f z (z) = k(1 z) k 1 s: share of offshorable tasks, s U(0, 1) After the lottery, firms only know z but are uninformed about s

10 The model Firm entry Firms form expectations on s: Probability of s > 0 is a positive function of z For tractability, we set this probability equal to z Firms can invest f units of labor into a fixed offshoring service, which provides information on the share s of offshorable tasks Intuition: Firms have to go through an in-depth analysis of their offshoring potential At ẑ a firm is indifferent between investing f or not

11 The model Illustration Firm entry and offshoring overlap f e draw (z, s) while only z is revealed z < ẑ z > ẑ no investment, f = 0 investment in off. service, f > 0 1 z z s =? s = 0 s 0 c d = (1 z)w p = π = pq σ σ 1 cd c d = (1 z)w p = σ σ 1 cd π = pq f c o = (1 z)wκ s p = σ σ 1 co π = pq f

12 The model Equilibrium Offshoring indifference condition (OC): { Γ 1 (ĉ, κ) = ĉσ 1 [ ] } [ ] k ĉk σ 1 1 ĉ k σ ĉ k σ + 1 ĉ σ 2 fe κ 1 σ 1 k σ + 2 f (1 σ) ln κ 1 = 0. establishes a negative link between ĉ and κ Labor market constraint (LC): Γ 2 (κ, ĉ) κ { σ + 1 σ 1 + 2σ [ (1 σ) ln κ σ 1 κ 1 σ 1 k σ + 2 ĉ k σ+1 [1 + (1 ĉ) (k σ + 1)] 1 establishes a positive link between ĉ and κ System of two equations which jointly determine a unique interior equilibrium with ĉ, κ (0, 1) ]} τl L = 0.

13 Equilibrium values of ĉ and κ = τw Equilibrium values of ĉ and κ = τw 1 κ 2 κ OC LC κ e ĉ e ĉ 1 1 ĉ apuano, Egger, Koch, Schmerer Figure: Equilibrium Offshoring andvalues Firm Overlapof ĉ and κ 15 of 24

14 Comparative statics: increase in f Comparative statics: increase in f 1 κ 2 κ OC LC κ e ĉ e f ĉ 1 1 ĉ apuano, Egger, Koch, Schmerer Figure: Equilibrium Offshoring andvalues Firm Overlap of ĉ and κ 16 of 24

15 Comparative statics: increase in τ Comparative statics: increase in τ 1 κ 2 κ ĉ 2 τ OC LC κ e ĉ e ĉ 1 1 ĉ apuano, Egger, Koch, Schmerer Offshoring and Firm Overlap 17 of 24 Figure: Equilibrium values of ĉ and κ

16 Data source German manufacturing establishments: years 1999, 2001, tasks from BIBB-BAuA 2006 survey Sample selection: large manufacturing firms (i.e., 4employees) Table: Summary statistics Mean Median Std. Dev. Offshoring Nr. of tasks Nr. of tasks/total nr. tasks Revenues 9,420,030 1,186,826 98,268,970

17 Method of Moments estimation Estimating k and ĉ Targeted moments: share of offshoring firms χ, first and second moments of 1 z Method of Moments (minimum-distance) constrained estimation [ 0 χ o {ĉ k 1 k ]} k + 1ĉ { k 0 c o 2ĉk+2 + k + { k 0 v o 3ĉk+3 + k +, k k + 1 k k + 2 k } 1ĉk+1 k + k k + 2ĉk+2 [ c(k, ĉ)] 2, }

18 Method of Moments estimation Estimating σ and r(1) We use ln r d (1 z) = ln r d (1) + (1 σ) ln(1 z) (2) And combine the OLS and FE moment conditions for identification [ ] ζ 1 = E ln r d ln r1 d (1 σ) ln(1 z) = 0, [ ] ζ 2 = E ln r d ln r1 d (1 σ) ln(1 z) ln(1 z) = 0 [ ] ζ 3 = E ln r d (1 σ) ln(1 z) = 0, [ ] ζ 4 = E ln r d (1 σ) ln(1 z) ln(1 z) = 0

19 Results Parameter values ĉ k χ c var(c) Estimates Targets Difference σ r d (1) Estimates ,421,002 Recovered parameters: κ, f, f E and τl/l κ f f e τl/l Parameters , , 265,

20 Results Welfare effects We use the parameter estimates to evaluate the welfare effects of offshoring Using per-capita { income as a welfare measure, we compute: ( ) 1 [ ( ) ] 1 } W = κl σ 1 1 ĉk σ 1 ĉ σ 2 f 1 σ τl 1 ĉ k σ+1 k σ+2 f e 1 Welfare increases by percent when moving from autarky to today In a model variant without overlap, welfare increases by percent

21 Counterfactual analysis Changes in the offshoring fixed cost f We evaluate: The welfare effects - Along the intensive margin of offshoring (i.e. keeping the share of offshoring firms χ constant) - Along the extensive margin of offshoring (i.e. keeping the effective wage differential κ constant) Effect on the overlap between offshoring and non-offshoring firms - Our aggregate measure of overlap is given by O = 1 ĉ ( ) 1 F c (ĉ) 1 2 kck 0 f c (c) f c (c)dc (3)

22 Counterfactual analysis Changes in the offshoring fixed offshoring cost ffixed cost f (in millions)!%!"&(%!"-%!"*% #"-% #"*% &"-% &"*% '"-% '"*% )#!% Welfare changes )&!% )'!% )-!% )(!%!"&'%!"&&% Overlap ),!% )+!%!"&!% )$!% )*!%!"#$% %% %% %% W (total) W (intensive) Overlap

23 Model fit Decile Overlap Difference observed computed Average

24 Robustness checks Table: Alternative estimation of σ Estimated Model: ln r d (1 z) = ln r d (1) + (1 σ) ln(1 z) Estimator OLS FE RE ln c = ln(1 z) (0.077) (0.340) (0.096) σ r(1) 88, , ,925 R-squared Observations

25 A model variant without overlap No overlap all firms investing f actually start offshoring We estimate another set of model parameters based on this new assumption We compare the welfare effects of offshoring in the two model variants Using per-capita income as a welfare measure, we find: Welfare increases by percent in the model variant with overlap Welfare increases by percent in the model variant without overlap

26 Results - No overlap ĉ k χ c var(c) Estimates Targets Difference σ r d (1) Estimates ,421,002 Recovered parameters: κ, f, f E and τl/l κ f f e τl/l Parameters , 229, 820 2, 345,

27 Conclusions Summary: Tractable model which matches the overlap between offshoring and non-offshoring firms Model-based estimation using German firm-level data Evaluation of the welfare effects and counterfactual analysis Main findings: Offshoring exerts a welfare stimulus Taking into account the overlap magnifies the welfare effects of offshoring In progress: More flexible structure for the correlation between number of tasks and the share of offshorable tasks