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Productive Offshoring: Evidence from Spain

Fragmentation of production and sourcing of intermediates from across the globe, popularly referred to as offshoring, is typically associated with lost jobs and displaced workers. Often ignored however, is a dimension of productivity-enhancing, within-firm reorganization spurred by offshoring. This paper provides novel evidence that such reorganization can take place in the form of increased innovation expenditure and change in firm level employment composition in favor of high-skilled workers. Using firm level microdata from the manufacturing sector in Spain, we construct a plausibly exogenous measure of offshoring and show that, following the financial crisis of 2008, offshoring has a positive effect on R&D expenditures and high-skilled employment in Spain. These findings are consistent with a heterogeneous firms model where reduction in trade costs augments the productivity of offshoring firms through the intensive margin of technology investments.