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An Assessment of Offshoring Performance at Korean Manufacturing FIrms

Author Lee Jae-yoon, Jeong Man-tae, Kho Dae-young, Kim Jae-duck, Yoo Yi-seon Date 2017.12.26 Page
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Offshoring, the practice of producing intermediate goods overseas for the purpose of importing, has become an important business management strategy for major manufacturers in Korea and around the world. The relocation of production bases overseas to take advantage of lower labor costs and other benefits began in the 1990s and gradually became a widespread phenomenon. In the early to mid-2000s, many firms companies relocated their production bases to China, but Vietnam has become a popular destination for relocated production lines since 2010.

 

The economic effects of offshoring can manifest in many different ways. While the results of empirical analyses conducted by most research studies suggest that the relocation of production bases around the world has mainly positive effects, its impact on employment remains unclear. There may be negative effects in substituting overseas workers for domestic personnel, but there may also be positive effects from the creation of a new labor force due to increased productivity and a greater focus on high-value-added sectors (design, R&D, etc.). Several empirical studies on offshoring have found that offshoring increases exports as a result of increased price competitiveness.

 

Meanwhile, concerns over hollowing out in the manufacturing sector have been raised in developed countries. Yet the same time, reshoring policies seem to be expanding in many countries. In the United States, the Obama administration offered incentives for domestic companies that had relocated overseas to return to the United States, including: lowering corporate taxes (from 38 percent to 25 percent), subsidizing 20 percent of the factory relocation costs, and extending tax exemptions for capital investment (one year to two years). The current Trump administration is also in the process of expanding policies to support the reshoring of companies, and the European Union has implemented an indirect reshoring policy by introducing mandatory origin labeling in 2014, aiming to enhance brand value and increase the advantages of regional production methods. In South Korea, the Ministry of Trade, Industry and Energy implemented the Act on Assistance to Korean Off-shore Enterprises in Repatriation in 2013 to provide various incentives, such as tax exemptions, premium locations, and subsidies for domestic companies that even partly reshore their offshore operations.

 

However, as reshoring is a recent phenomenon, analytical data is lacking. As a result, efforts to conduct detailed empirical analyses of its effect on domestic employment productivity are subject to many limitations. On the other hand, offshoring has been observed for a much longer period of time. It may thus be more appropriate to analyze the outcomes of offshoring and use the results of the analysis to consider the direction of reshoring policies and the strengthening of industrial competitiveness. 

 

Therefore, this study aims to provide a comprehensive analysis of the effects of offshoring on corporate performance, including employment and productivity, using data from South Korean companies. By doing so, we hope to overcome the major limitations of studies that have analyzed the impact of offshoring on the global value chain and identify a precise causal relationship between offshoring and corporate performance. Although corporations are the main actors in the global value chain, relatively few quantitative analyses have used corporate data owing to the proprietary nature of much of it. As a result, most analyses tend to focus on industries or nations. In addition, offshoring and other concepts related to overseas production have been used interchangeably, despite differences in meaning. To avoid this, this study will first clearly define relevant concepts before conducting its main analysis. Next, we will consider ways of alleviating the problem of endogeneity, which can be a hindrance in analyzing causality between overseas production and corporate performance. Lastly, this study will perform a quantitative analysis to derive policy implications, rather than the existing empirical analysis used for verifying theoretical models.