Discussion paper by: Dalia Marin Presented by: Eva-Maria Sonnleitner A international Division of Labor in Europe: Outsourcing and Offshoring to Eastern Europe Discussion paper by: Dalia Marin Presented by: Eva-Maria Sonnleitner

Introduction – Motivation for research Economic changes in the last decades Motivation for the research Firms geographically separating different production stages across the world economy Reason: exploit differences in production costs Eastern enlargement  reorganizing the international value chain  Offshoring  Outsourcing Eastern Europe is an important production location for European firms new division of labor has emerged in the world economy Three main research questions in the paper Why do firms organize in an international value chain? Extent of offshoring and outsourcing to new member states to countries of the next enlargement round or former Soviet Union What determines empirically the level of offshoring and outsourcing to Eastern Europe Research: 660 Austrian and German firms with 2200 investment projects to Eastern Europe from 1990 till 2001  100% of Austrian and 80% of German direct investments Friday, December 07, 2018

Why do firms organize in an international value chain? In general: Firms chooses location with lowest production costs (transport costs, wages costs of contracting) Headquarter services > incentives of input supplier Reduced initiative of skilled worker is less critical than the hold up problem Offshoring Relocation of activity which remains inside the firm More control Stronger incentives to provide headquarter services Loss of middle management incentives Costs of hierarchies Outsourcing Relocation of activity outside the firm Input supplier in New Europe Promotes incentives of input supplier Risk of hold up  incomplete contacting How much control over firm activities? Where locate production , at home or abroad? Headquarter services < incentives of input supplier Reduced initiative of skilled worker is more critical than the hold up problem Friday, December 07, 2018

How important is Offshoring ? – Empirical Facts Offshoring to EE Austria Germany CEE Baltic States Czech Republic Hungary Poland Slovak Republic Slovenia 17.12 3.11 11.73 10.19 41.54 9.94 15.49 46.68 28.43 75.95 27.18 14.50 68.71 12.44 SEE Bulgaria Romania Other SEE 12.06 2.99 24.20 8.46 55.68 71.94 63.68 14.29 CIS Russia Ukraine Other CIS 42.11 67.90 16.14 3.72 29.15 26.59 17.11 49.36 Total Eastern Europe 17.27 45.44 Firms` Offshoring activities as percentage of all direct investments in respective Eastern Europe countries Intra-firm trade with Eastern Europe; exporting input goods to affiliates in EE; importing this goods back Intra-firm export and import In Germany Offshoring much more important than in Austria Friday, December 07, 2018

Intra-firm trade as percentage of total trade with EE Share of intra-firm exports in total exports to EE Share of intra-firm imports in total imports from EE CEE Baltic States Czech Republic Hungary Poland Slovak Republic Slovenia 13.95 19.67 20.03 41.08 26.11 18.70 na 42.17 136,47 64.91 54.71 48.36 5.19 6.83 11.95 17.77 34.01 3.32 14.41 15.64 40.46 15.34 64.98 9.38 SEE Bulgaria Romania Other SEE 3.36 16.08 22.72 11.32 40.40 57.46 2.30 1.95 3.86 4.20 7.17 CIS Russia Ukraine 34.57 12.00 26.70 21.52 4.94 4.51 1.67 2.44 Total Eastern Europe 22.40 68.52 11.67 21.56 Friday, December 07, 2018