BOX 5.1 Economic Impact of R&D Outsourcing

A few studies estimating the economic impact of outsourcing appear to be directly relevant to the study of globalization of MSE R&D. Most of them were carried out using European data and focused more on the outsourcing of intermediate goods and not so much on services.a The most well-known analysis for the United Statesb focused on the outsourcing of intermediate inputs and its effects on the wage premium for skilled workers. The studies did not, however, consider outsourcing of services. A back-of-the-envelope estimate for the IT industryc suggests that the potential benefits of outsourcing services are high and concludes that IT outsourcing led to an annual increase in productivity of 0.3 percent points from 1995 to 2002, or $230 billion in additional GDP.

European studiesd used plant-level data for the electronics industry in Ireland from 1990 to 1995 to show that international outsourcing of services had a positive, albeit not very

a  

Several studies identify cost-saving as the primary motive for outsourcing intermediate goods, among them, Hartmut Egger and Peter Egger, “International Outsourcing and the Productivity of Low-Skilled Labor in the EU,” WIFO-Working Paper 152 (2001), available at http://publikationen.wifo.ac.at/pls/wifosite/wifosite.wifo_search.frameset?p_filename=WIFOWORKINGPAPERS/PRIVATE5397/WP152.PDF; Hartmut Egger and Peter Egger, “Outsourcing and Skill-Specific Employment in a Small Economy: Austria After the Fall of the Iron Curtain,” Oxford Economic Papers 55(4) (2003): 625–643; and Sourafel Girma and Holger Görg, “Evaluating the Causal Effects of Foreign Acquisition on Domestic Skilled and Unskilled Wages,” Bonn: IZA-Institute for the Study of Labor (2003).

b  

Robert C. Feenstra and Gordon H. Hanson, “Global Production Sharing and Rising Inequality: A Survey of Trade and Wages,” National Bureau of Economic Research Working Paper No. 8372 (2001). Feenstra and Hanson construct industry-by-industry estimates of outsourcing (of intermediate products) from 1972 to 1992. Looking at these data, they find that outsourcing contributed substantially to an increase in domestic demand for high-skilled nonproduction workers and in their wages.

c  

Catherine L. Mann, “Globalization of IT Services and White Collar Jobs: The Next Wave of Productivity Growth,” International Economics Policy Briefs 3-11: Institute of International Economics (2003), available at http://www.iie.com/publications/pb/pb03-11.pdf.

d  

Holger Görg, Aoife Hanley, and Eric Strobl, “International Outsourcing and Productivity: Evidence from Plant Level Data,” GEP Research Paper 04/08, Nottingham: University of Nottingham (2004), available at http://www.nottingham.ac.uk/economics/staff/details/papers/holgerweb7.pdf.

MSE R&D globalization requires data gathered over time on (1) domestic and international R&D in various MSE subfields and (2) the contribution of MSE R&D to the production of other goods and services in the economy. Such data are not readily available at present. The objective of this study is therefore more modest: to identify the key factors that are likely to determine the impact of materials R&D globalization on the U.S. economy. Understanding such factors is crucial to making an informed decision about whether any policy intervention is needed and, if so, what form it should take.



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