Offshoring and Transport Costs

In this paper we look at the link between transport costs and offshoring activity. The paper does not aspire to be a complete survey of the literature on the causes and consequences of offshoring, which could possibly fill volumes. Rather we focus on those contributions that, in our view, have the strongest relation with transport costs. We, firstly, discuss the measurement of offshoring and uses aggregate data to chart some recent developments. We then look at some theoretical contributions that consider the implications of transport costs for offshoring. We discuss the view taken by, for example, Jones and Kierzkowski (1990) that transport and other services are necessary to connect production stages located in different countries and that a fall in the cost of services should prompt increases in offshoring. In the simplest set-up, costs of services are considered fixed costs. Furthermore, we look at more formal models that deal with the choice of how to organize production, where transport involves variable costs. We start with the choice between exporting, horizontal or vertical FDI, and also deal with models with more “complex” internationalization strategies. We then look at the implications of offshoring due to falling transport costs for labour market outcomes. Finally, we discuss some empirical evidence on the link between transport and other trade costs for offshoring.