Is Offshoring the Driving Force Behind Export?

Abstract

Global FDI inflows dropped by nearly 40% from 1.7 trillion USD in 2008 to less than 1 trillion USD in 2009 as UNCTAD reported. While developed economies noticed significant fall in FDI inflows (by 93% in USA, 57% in UK), many economies have been attracting foreign investors through local sources, such as labor cost, infrastructure, skilled labor force.

Poland as an economic leader in Central Europe has recently been a very attractive location for foreign businesses. The market offers many advantages of a stable economy. As a leading European destination of BPO and shoring investments, Poland receives increasingly larger number of advanced processes and functions. Therefore in many cases it becomes leading service provider (in the business services sector) in this part of Europe. BPO/SSC units serve their mother investors and many other companies both domestically and internationally.

The concept of FDI effects in the economy led us to the topic of international trade in services. We claim that when the vital motivation of investment is to take advantage of the local resources (resource seeking and efficiency seeking motives of FDI, vertical investment), not to serve the local market (market seeking motive, horizontal investment), then the majority of services produced are exported. In other to prove this statement we use data of FDI in manufacturing, services and research and development in ten Central and Eastern European countries and exports of the same sectors and examine the relationship between the two in the years 1999-2008 trying to face our results with many concepts revealed in recent papers (Barry, Görg, McDowell [2003]; Helpman [2006]).

Keywords: FDI, offshoring, R&D investment

JEL Classification: D21, F21