The external effects of offshoring on job security in SMEs

Abstract

We investigate the effects of offshoring on job security using matched employer-employee data from Sweden. Between 1997 and 2011, the share of offshoring firms fell from around 25 to 22% while offshoring per worker within offshoring firms almost doubled. We use this variation to contribute to the literature by examining the effects of the neighboring firms’ offshoring (external offshoring) on job separation in small and medium-sized enterprises (SMEs). Our results suggest that external offshoring has a significant impact on job security in SMEs that do not offshore themselves. In addition, having a university degree, being young, and being new to the job reduce the risk of a job exit due to increased external offshoring. This result is indicative of a Schumpeterian job-restructuring effect where old jobs are replaced by newer ones. Finally, the increased risk of a job exit in SMEs suggests a higher vulnerability of these firms to local shocks due to offshoring activities in larger neighboring firms.

Plain English Summary

Offshoring leads to higher job exits in small and medium-sized enterprises (SMEs) that do not offshore themselves, as per new evidence from manufacturing firms in Sweden. This effect is highest for less educated and older workers. Manufacturers are ever more involved in fragmented supply chains where they supply intermediate inputs to one another. This suggests that any decision made by one manufacturer to offshore (replace a local supplier with a foreign one) may have negative effects on the workers of other firms. SMEs may be more vulnerable to offshoring because they tend to be more local in their activities, although they may not offshore themselves. This study uses a data set from Sweden to explore the effects of offshoring on the job security of workers in small and medium-size enterprises (SMEs). We find that offshoring activities within Sweden lead to higher job exits in SMEs that do not offshore themselves. This effect is highest for low skill (less educated) and older workers. Policy makers should be aware of the vulnerability of SMEs to offshoring activities of other often-larger firms through channels related to supply chains.