Analysis of the offshoring of materials and services and future

KIET NEWS BRIEF August 11. 2008 e-Kiet Industrial Economic Information, vol. 410 by Kim Won-gyu, Choi Hee-seon Analysis of the offshoring of materials and services and future suggestions Offshoring in Korea T T - he rapid advancement of globalization has resulted in enterprises the world over expanding their global production structures as part of their efforts to improve productivity and reduce production costs. This has ushered in a new wave of offshoring characterized by the import of intermediate goods within and between enterprises. he estimation of the percentage of Korea’s material and service offshoring, which was prepared based on the inter-industry relations table (1990, 1995, 2000, and 2003), revealed that: The percentage of materials offshored by Korean industries has increased since 1990 to 17.3% in 2003. Meanwhile, although lower than was the case with materials, the percentage of services offshored also increased after 1990, reaching as high as 3.3% in 2000. However, it consequently decreased to a low of 2.7% in 2003. W hile the offshoring of materials increased from 20.1% in 1990 to 26.4% in 2003 in the case of the manufacturing industry, the offshoring of services has remained at a very insignificant level of 1% or less since 1990. 1 - While the offshoring of materials in high-tech manufacturing industries exhibited a continuous increase, moving from 24.5% in 1990 to 32.3% in 2003, the offshoring of materials in low-tech manufacturing industries increased from 18.3% in 1990 to 19.3% in 1995, before decreasing to 18.2% in 2003. s far as the service industry is concerned, the offshoring of materials decreased from 4.3% recorded in 1990 and 1995 to 4.0% in 2000. It thereafter increased to 4.5% in 2003. Meanwhile, the offshoring of services increased from 4.1% in 1990 to 6.2% in 2000, before decreasing to 5.9% in 2003. A s such, this analysis revealed that the manufacturing industry has been the major player within the overall Korean economy when it comes to the offshoring of materials, and that this trend has been especially pronounced within high -tech manufacturing industries. - A Unlike the offshoring of materials, the offshoring of services remains rather insignificant in Korea. However, the ratio of services offshored by 2 the service industry has been higher than has been the case in the manufacturing industry. - This can be construed as a sign that Korea has established a global production system that has revolved around the manufacturing industry in general, and especially high-tech manufacturing industries. Changes in offshoring in Korea at the individual industry level look at trends in the percentage of materials offshored at the individual industry level revealed a rise in 45 of the 73 industries sampled in percentage of materials offshored in 2003 vis-à-vis 1990. - A The percentage of materials offshored increased in 4 of the 7 industries associated with the agriculture, fishery and mining sector, in 33 of the 50 industries linked to the manufacturing sector, and in 8 of the 16 industries associated with the social overhead capital and service sector. M I eanwhile, 30 of the 73 industries surveyed were found to have a percentage of its materials offshored that was higher than that of the overall industries (17.3%) in 2003. In this regard, all of these industries were from the manufacturing sector (50 industries). n addition, an analysis of the percentge of services offshored at the individual industry level revealed that 33 of the 73 industries polled had increased the amount of services they offshored, which was only slightly higher than was the case with the offshoring of materials. T - he highest percentage of services offshored in 2003 was exhibited by the transport and storage industries (34.2%). This was followed by the communication and broadcasting (8.9%), wholesale and retail (7.7%), marine products (5.8%), finance and insurance (4.4%), shipping (3.7%), and petroleum products (3.2%) industries. Analysis of the relationship between offshoring and productivity/ employment T his study analyzed the relationship between offshoring and productivity/ employment. 3 T - he estimation of the relationship between the level of offshoring and labor productivity revealed that: While the offshoring of materials was found, at a 5% significance level, to have a positive influence on labor productivity in the case of high-tech manufacturing industries, no significant influence was uncovered where the labor productivity of the low-tech manufacturing, service, and other industries was concerned. Meanwhile, while the offshoring of services was found to have a negative influence on the labor productivity of high-tech and service industries, and this at a minimum of a 5% significance level, it did not have any significant influence on the labor productivity of low-tech manufacturing and other industries. - T - he examination of the relationship between offshoring ratios and employment revealed that: While the offshoring of materials was found to have a negative influence on employment in low-tech industries, and this at a 1% significance level, it did not have any significant influence on employment in the case of the high-tech manufacturing, services, and other industries. Meanwhile, the offshoring of services did not have any significant effect on employment in high-tech manufacturing, low-tech manufacturing, service, and other industries (for more details relating to the analytical method employed and the contents of this analysis please refer to the original text). - This is because the proportion of construction investment with a high employment coefficient is far larger in services (44.0%) than in manufacturing (16.3%). I n determining the employment-creating effects of investment activities in each business type, accommodations and restaurants showed the highest level with 17.9 persons followed by public administration and military services (17.3) and wholesale and retail (16.9). Note that these figures are higher than the industry average. - Moreover, investment in the manufacturing industry had the largest effect on general machinery with 0.536 followed by electricity and electronic devices (0.189), basic metals (0.180), real estate and business services (0.175), and construction (0.173). 4 Future policy suggestions T - he above results indicate that while the overall offshoring of materials has increased since 1990, this spike has for the most part been limited to hightech manufacturing industries, and that in the case of these industries, this increase in the offshoring of materials has contributed to an increase in labor productivity. Meanwhile, the increase in the offshoring of materials has failed to improve the labor productivity of low-tech manufacturing, service, and other industries. This result can be explained by a general lack of global production structures where these industries are concerned. econd, while the offshoring of materials contributed to improving the labor productivity of high-tech manufacturing industries, it did not have any negative influence on their employment trends. - S Given the fact that worries that such offshoring could negatively influence domestic employment can now be put to rest, and that such offshoring can contribute to the advancement of the industrial structure, the offshoring of materials by high-tech manufacturing industries can thus be regarded as a desirable development. T - hird, while the offshoring of materials by low-tech manufacturing industries was found to negatively influence employment, it also did not have any positive influence on labor productivity However, the ratio of materials offshored by low-tech manufacturing industries has actually decreased since 1995. This can be construed as a sign that this decrease trend in terms of the offshoring of materials has in effect acted as a restraint on further decreases in employment within low -tech manufacturing industries since 1995. Although this denouement may be desirable where employment is concerned, it can also be taken as an indication that the actual restructuring of the low-tech manufacturing industries has been delayed. - F tries. - ourth, the offshoring of services was found to have a negative effect on labor productivity in the case of both high-tech manufacturing and service indus- This can be regarded as the result, in the case of high-tech manufacturing industries, of the focus on the establishment of a global production structure that is based on the offshoring of materials. Meanwhile, as far as the 5 service industry is concerned, this can be construed as having been caused by the absence of a global production structure, a denouement which has occasioned by the failure to secure additional markets, or by lower competitiveness of the domestic service industry. - The fact that the ratio of services offshored by high-tech manufacturing industries has decreased since 1990 can consequently be perceived as a sign that this trend has had a positive influence where the labor productivity of these industries since 1990 is concerned. Meanwhile, the fact that the ratio of services offshored within the service industry has increased since 1990 can be construed as a sign that this trend has in fact had a negative influence on overall labor productivity within the service industry after 1990. - T - he above suggestions indicate that the sustainable development of Korean industries is predicated on the advancement of intra- and inter- industrial upgrading. Where inter-industrial upgrading is concerned, the need arises to strengthen the global production system of the high-tech manufacturing industry. It is also necessary to aggressively implement the globalization of the service industry by expanding the number of markets open to it and making efforts to improve its overall productivity. In terms of intra-industrial upgrading, it is necessary to facilitate the restructuring of low-tech manufacturing industries. It is essential to facilitate the transfer of these low-tech manufacturing industries to high value -added fields in which Korea enjoys a comparative advantage along the value-chain. With regard to those low-tech manufacturing fields at which Korea is at a comparative disadvantage, measures should be found to either gain access to foreign markets or move towards import substitution. - n addition, efforts must be made at the policy level to assuage the decrease in employment that may occur during the process of bringing about a highly advanced industrial structure, and especially during the process of upgrading the low -tech manufacturing industry. It is in particular necessary to establish key measures for lifelong education to strengthen and improve the effectiveness of the vocational training and the job transfer training systems. I M eanwhile, the importance of the offshoring of materials and services will decrease once the domestic parts & materials industry, as well as the service industry, have become internationally competitive. In this regard, it is necessary to increase competitiveness in these industries. 6