Information and Communication Technologies, Foreign Outsourcing and Offshoring, and Firm Performance(2/2)

Profound innovations in information and communication technologies (ICT) has beenaccompanied by increased formation of global value chains that are creating newopportunities for firms to become more globally integrated. The emergence of ICT hasenabled firms to reduce transactions costs, including those in transportation, communication,and coordination. Theoretically, there is no compelling reason why ICT investment inmanufacturing should necessarily increase the probability to offshore. On the one hand, thereduction in communication and coordination costs is likely to favor offshoring. On the otherhand, increased complementarity of production stages within the firm or the augmentedcomplexity of tasks induced by ICT investment might reduce the incentive to offshore asopposed to in-house production. Therefore, this remains to be an empirical issue. Priorfirm-level evidence generally supports for a positive relationship between ICT use and globalsourcing activity (Tomiura, 2005; Abramovsky and Griffith, 2006; Hyun, 2010). However,recent studies provide mixed results for the U.S. and Italy. Fort (2016) find the effect ofcommunication technology on sourcing activities is disproportionately larger for domesticthan for foreign sourcing in the U.S. Controlling the endogeneity of ICT use, Benfratello et al.(2015) use the data on Italian firms to show that ICT has a negative effect on offshoring. Theeffect is only significant for low-tech firms, implying that ICT may substitute for routine tasksdomestically.There are different channels through which offshoring may generate productivity gains.For example, static efficiency gains may arise when firms focus on their core competenciesand offshore their non-core activities. By interacting with foreign suppliers, offshoring firmsmay benefit from learning externalities. Offshoring may also raise productivity if the importedinput varieties are of higher quality or better match with the needs of the firm. The existingliterature provides some evidence that offshoring can increase productivity, but the identifiedeffects are quite heterogeneous depending on the context of country, the type of firms or thetype of offshored inputs (materials or services) (McCann, 2011; Schwo¨rer, 2013). In thisstudy, we will control for the endogeneity of offshoring by using the propensity score matching techniques.The purposes of this study are twofold. First, we examine the adoption of ICT on thepropensity of offshoring (or foreign outsourcing). Second, we evaluate the impact ofproduction/service fragmentation on firm performance (eg, productivity, innovation andemployment). The data we use include the 2006 and 2011 Manufacturing Census, the panelstructure of electronics firms, and the datasets on linking the censuses with two CommunityInnovation Surveys. The subjects of interest are widely discussed in the developed countries,while evidence from developing countries is relatively scant. The findings in this study wouldprovide important implications on business strategies and the relevant industrial andinnovation policies.