Working Paper: CEPR ID: DP6080
Authors: James R. Markusen; Bridget Strand
Abstract: Trade in business services has been attracting attention from academic researchers, policy makers, and business journalists. While there are many anecdotes, there has been little in the way of formal theory applied to this issue. In this paper, we adapt a general model of fragmentation of production activities to try to capture the specific features of business services. Following a general discussion, we calibrate a numerical general-equilibrium simulation model to a situation in which both trade and foreign investment in services are initially banned to technically infeasible. We then compute three counter-factual scenarios: one in which trade but not investment in services is feasible or allowed, one in which investment but not trade is allowed, and one in which both trade and investment in services are allowed.
Keywords: business services; foreign investment in services; fragmentation; offshoring; outsourcing; trade in services
JEL Codes: F0; F23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increased trade in services due to changes in communication and information technology (L86) | Geographic fragmentation of production processes (F12) |
| Increased ability to fragment production and trade services (F12) | Access to cheaper production of less skilled phases of production (L23) |
| Access to cheaper production of less skilled phases of production (L23) | Enhanced competitiveness and maintained or driven up demand for skilled labor (J24) |
| Access to foreign service providers (L84) | Increased real productivity in North (O49) |
| Wider range of services available (L89) | Higher productivity or lower price indices for composite service inputs (C43) |
| Offshoring (F23) | Significant benefits for skilled labor in North (J24) |
| Offshoring (F23) | Smaller losses for unskilled labor (F66) |
| Liberalization (F69) | Enhanced competitiveness and productivity (O49) |
| Liberalization (F69) | Rise in real wage of skilled labor (J31) |
| Liberalization (F69) | Increase in real wages for unskilled labor (depending on scenario) (F66) |