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Research Monograph

Internationalization of Production in East Asia and Changes in Employment Structure

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  • Author Sanghoon Ahn, Hongshik Lee
  • Date 2013/12/31
  • Series No. Research Monograph 2013-04
  • Language Korean
SUMMARY This research monograph looks into the theoretical and empirical links between the international organization of production processes in East Asia and the changes in employment structure in Korea. The main focus is on the impacts of foreign direct investment (FDI) and outsourcing on employment dynamics in Korea since the late 1980s. The monograph consists of six chapters as follows.

Chapter 1 “Structural Changes in the Korean Economy and the Internationalization of Production” provided an overview of the structural changes in the Korean economy since the 1980s focused on the trends and shares of manufacturing and services in comparison with those in major countries. Based on the establishment-level micro data, job creation and job destruction at the industry-level were decomposed into the entry, growth, decline, and exit of individual establishment. Employment share of low-tech manufacturing declined steeply since the late 1980s, when intra-regional trade of intermediate inputs expanded rapidly in East Asia. Chapter 1 also reviewed main empirical findings from abroad on the effects of the internationalization of production on the employment and wage development.

Chapter 2 “Internationalization of Production and Manufacturers’ Employment: An Empirical Study on Establishment-Level Micro-Data” looked into micro-data of Korean manufacturing (1990~2003) from the Annual Survey of Mining & Manufacturing linked with industry- level data on trade and foreign investment. It was found that manufacturers in an industry more exposed to competition from China via FDI (foreign direct investment) and trade had showed lower employment growth. This finding is consistent with the finding from the US which detected negative impacts of offshoring to low-wage countries on domestic employment. This finding is also consistent with the finding from Korea reported in Chapter 3. While most existing studies focused on the “China effect” via FDI, findings from Chapter 2 suggests that there exist other important channels (such as trade and outsourcing) of the “China effect” on domestic employment.

Chapter 3 “Effects of FDI on Employment and Productivity” paid attention to the fact that effects of FDI would be different depending on its motivation and destination. Therefore, the analysis separated FDI to developing countries from that to developed countries, and investigated the impact of outbound FDI on domestic employment (and productivity). Using firm-level data on 462 multinational companies which started FDI during the period from 1981 through 1995(treatment group) and on 3,763 comparable domestic companies which were not involved in FDI(control group), a difference-in- difference estimation based on the propensity score matching detected a negative short-term effect of FDI to developing countries including China on domestic employment. Furthermore, those companies which implemented FDI were employing more, producing more, more productive, and paying higher wages relative to other domestic companies.

Chapter 4 “Effects of FDI on Wage” analyzed the effects of the increasing cross-border mobility of capital on labor market using industry-level data from Korea and the US. According to the Nash Bargaining Model approach, the higher the profit achieved from FDI is, the equilibrium level of negotiated wage level becomes lower. Empirical studies on 31 manufacturing industry-level panel data from the US(1983~96) and 20 manufacturing industry-level panel data from Korea(1993~2005) detected negative effect of FDI on wage premium both in the US and in Korea. In particular, such negative effect of FDI was more pronounced in case of unskilled workers who had attained secondary or lower education.

FDI is the main vehicle of the narrowly-defined “internationalization of production”. In a broader sense, however, international outsourcing or offshoring is another important format of internationalization of production. Chapter 5 and Chapter 6 were focused on effects of outsourcing intermediate inputs on employment and industrial structure, while previous chapters were focused on effects of FDI on employment and wage.

Chapter 5 “Internationalization of Production and Labor Market in East Asia” looked deeper into the progress in East Asia using the OECD-WTO Trade in Value Added database and then investigated effects of intra-regional international outsourcing in East Asia on domestic labor demand using industry-level data from Korea and Japan. In case of Korea, outsourcing to China and outsourcing to Japan had opposing effects on labor demand. Outsourcing to China shifted labor demand from workers with secondary education to workers with tertiary education, while outsourcing to Japan shifted labor demand from workers with tertiary education to workers with secondary education. In other words, intermediate goods imported from China embodied unskilled labor and hence outsourcing to China substituted for production activities which hired unskilled labor intensively, while intermediate goods imported from Japan embodied skilled labor and hence outsourcing to Japan substituted for production activities which hired skilled labor intensively. The finding on outsourcing in this chapter is consistent with findings on FDI from Chapter 2 and Chapter 3. All in all, both FDI and outsourcing to developing countries in search of lower wage could have negative impacts on employment and wage of unskilled workers in domestic labor market.

Chapter 6 “Effects of Service Outsourcing on De-industrialization and Employment Structure” offers a different view on de- industrialization. While earlier chapters emphasized the “international” factors behind changes in employment structure, this chapter was focused on “domestic” factors. Chapter 6 compared existing hypotheses on the reasons behind de-industrialization and offered service outsourcing in the manufacturing sector as a major factor behind declining employment share of manufacturing. This hypothesis of service outsourcing also provides an explanation for the expanding productivity gap between manufacturing and services in Korea. Chapter 6 plays an important role in this research monograph in that it reveals major limitations of the book and is complementary to other chapters in the book. Earlier chapters were focused on manufacturing and international factors. Current changes in employment structure requires further research on service sectors and domestic outsourcing, which could have been totally missed without Chapter 6.
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