Potential Offshoring: Evidence from Selected OECD Countries

Rapid advances in information and communication technologies (ICTs), combined with continuing efforts to liberalize international trade and investment in services, have increased the tradability of services and created new types of tradable services. This, in turn, has led to a new wave of globalization in the services sector, with the offshoring of particular types of services activities now becoming increasingly common, as it has been for many years in manufacturing. New technological developments now allow many service activities to be carried out regardless of their geographic location, and their production and delivery no longer have to take place in the same location. As a result, many white-collar jobs that were shielded from international competition now face competition from abroad.

Despite the widespread media attention given to the apparent offshoring of service sector jobs, little is known about the extent of this phenomenon, or the extent to which it is related to other economic and structural developments. This paper draws on and extends a previous detailed analysis of occupational data for selected OECD countries that sought to determine the share of total employment that could potentially be affected by the international sourcing of IT and ICT-enabled services (van Welsum and Vickery 2005a). Including both the low- and the high-skill white-collar occupations potentially affected by global services sourcing, that analysis suggested that close to 20 percent of total employment could potentially be affected by offshoring. The work also found that sectors such as business services (for example, accounting and consulting), financial services, and research and development have a relatively high share of such employment. It is important to keep in mind that "potentially affected by offshoring" refers to activities that could be coming into a country as well as those that might leave a country. Incoming offshored services activities would bring about an increase in the share of employment potentially affected by offshoring, whereas services activities that leave a country would bring about a relative decline in the share.

This paper takes this analysis one step further by examining the relationship between the share of employment potentially affected by offshoring and other economic and structural developments, using some simple descriptive regressions on a panel of OECD economies between 1996 and 2003. In particular, first estimates are provided of the statistical association between the share of employment potentially affected by service sector offshoring, trade in business services, and foreign direct investment.The analysis in this paper does not find any systematic evidence to support the popular belief that net outward investment or imports of business services are associated with significant declines in the share of employment potentially affected by offshoring, at least at the aggregate level. Exports of business services are found to have a positive statistical association with the share of employment potentially affected by offshoring, suggesting that increases in demand and production have also raised demand for these types of ICT-using occupations. Other factors positively associated with the share of employment potentially affected by offshoring are found to be the comparative size of the service sector, the growing share of ICT investment in total fixed investment, and human capital.

Although there are no direct official data measuring the extent of offshoring, it is commonly believed that it has the potential to grow substantially beyond its current relatively small level. This paper aims to contribute to the debate surrounding offshoring by looking in detail at some of the trade in services and employment data that may reveal further insights about its current extent, as well as by performing a simple descriptive econometric analysis of the factors statistically associated with movements in the aggregate share of employment that could potentially be affected by offshoring.

The paper is organized as follows. The next section looks at what can be learned about offshoring on the basis of data on trade in...