The Effects Of Service Outsourcing On The Upgrading Of Global Value Chain Of Manufacturing Industry

With the development of the global value chain,specialization offers developing countries an opportunity in which they can join the global economy.However,since developing countries’ weak foundations and capital accumulation are limited by their counterparts’ technology monopolies,developing countries are usually strapped to the lower end of the global value chain and find it difficult to upgrade.Therefore,the power of moving up the global value chain for realizing structure transformation and economic catch-up is essential.Regarded as an important approach for firms to integrate global resources,service outsourcing plays an important part in adjusting the industrial structure,improving employment,promoting economic growth and division of labor in the global value chain.However,few pieces of literature comprehensively and systematically investigate the effect and mechanism of service outsourcing on the upgrading of the manufacturing value chain.According to the logic of "raising problems,analyzing problems,solving problems",this paper mainly discusses the following issues with the research paradigm in which theoretical analysis and empirical test mutually supporting:(1)Whether service outsourcing can affect the upgrading of the value-added capability of the manufacturing value chain;(2)Whether service outsourcing influences manufacturing value chain embedded location upgrading and in what direction;(3)Transnational capital gradually becomes a dominant factor in the value chain division,it’s hard to ignore distorted distribution structure of factor income caused by globalization.Whether service outsourcing affects the value chain’s labor income and division of labor;(4)Accurate quantitative assessment of causal effect is a difficult problem in current empirical research.As the leading force in the development of China’s service outsourcing industry,the establishment of Service Outsourcing Demonstration Cities provides a rare quasi-natural experiment for accurately and quantitatively evaluating the upgrading of the manufacturing value chain by service outsourcing.Can the establishment of service outsourcing demonstration cities effectively promote the upgrading of manufacturing value chains? This paper has important policy implications in facilitating the development of service outsourcing,promoting the practice of Service Outsourcing Demonstration Cities,enhancing China’s export value-added ability and value chain control ability,and realizing manufacturing value chain upgrading.This paper draws conclusions as follows:(1)Based on multinational data,service outsourcing obviously promotes the manufacturing value chain.Specifically,it is beneficial for one’s manufacturing to move up to higher value-added parts at the lower end of the value chain.Moreover,the fact that service outsourcing promotes the manufacturing value chain from factors of labor further consolidates the positive effect of service outsourcing on the manufacturing value chain.It shows that service outsourcing can further strengthen the leading of the high value-added part in the value chain.These conclusions are robust after a multitude of endogenous and robustness checks.The mechanism test finds that imported intermediates substitution,imported intermediates quantity reduction,R&D and productivity improvement(especially labor productivity)are the main mechanisms that enhance manufacturing value chain upgrading.Additionally,service outsourcing is able to promote value chain upgrading from factors of labor through promoting labor market adjustment.The heterogeneity test shows that the impact of service outsourcing on manufacturing value-added ability is gradually strengthened after the financial crisis,while the effect on manufacturing embedded position is weakened and the effect on the value chain of labor is not changed.In different countries,service outsourcing has a greater impact in middle-income and high-income countries.Onshore service outsourcing can solidify countries’ labor income,while offshore service outsourcing enables to adjustment of labor income and solves the problem of income distribution.In industries with different technological conditions and different types of services,service outsourcing can boost labor in industries of low technology to move up to higher value-added parts at the lower end of the value chain;the overall effect of service outsourcing in middle technology and high technology manufacturing is obviously greater than that in low technology manufacturing;the value chain upgrading effect of business service outsourcing is more obvious,and it can increase the share of domestic labor reward in export;non-business service outsourcing is beneficial to promote labor factors to move to higher value-added parts upstream of the value chain.(2)Based on data discovery in China,service outsourcing reduces manufacturing export domestic value-added rate and industry upstream which results in China being locked into the lower value-added part of the value chain.What’s more,the paper also finds that the development of offshore service outsourcing can reduce China’s domestic labor share of manufacturing export.The heterogeneity test shows that service outsourcing in China has a significantly positive effect on the domestic value-added rate of exports and a stronger effect on the upgrading of the value chain embedded position after the financial crisis,indicating that China breaks the “low-end locking” by carrying on service outsourcing after the financial crisis.In terms of different trade modes,service outsourcing significantly promotes the value-added capacity of the global value chain for processing trade and the upgrading of the embedded position of the global value chain for general trade.In industries with different technological conditions and different types of services,onshore service outsourcing comprehensively promotes the value chain upgrading of the low-technology manufacturing industry,and the value chain upgrading effect of business service outsourcing is more obvious.Both business and non-business offshore service outsourcing has a significantly negative impact on the domestic labor share of export in different technology industries.Onshore service outsourcing,especially business service outsourcing,inhibits the raising of the share of domestic labor reward in export,especially in low-technology industries.It is clearly that service outsourcing can promote China’s manufacturing value chain upgrading,but the“poverty growth trap” caused by the upgrading needs to be alert.(3)The research uses the quasi-natural experiment of Service Outsourcing Demonstration Cities and Chinese micro-data of enterprises.By using difference-in-difference,we found that the establishment of Service Outsourcing Demonstration Cities has significantly promoted the value chain value-added ability and embedded location of manufacturing enterprises in China.This result is robust after common trend test,placebo test,progressive difference-in-difference test,and a series of other robust tests.There are two mechanism findings.On the one hand,Service Outsourcing Demonstration Cities play an exemplary role in policy.Service Outsourcing Demonstration Cities improve the domestic value-added rate and the upstream level of enterprises’ exports by promoting the industrial agglomeration of the service industry,enhancing the service level of the regional manufacturing industry,and increasing the abundance of regional labor supply.On the other hand,Service Outsourcing Demonstration Cities drive the development of the service outsourcing industry and exert the economic effect of the outsourcing industry itself,which means it promotes the upgrading of the value chain of manufacturing enterprises by influencing enterprise research and development innovation and productivity.The heterogeneity analysis shows that Service Outsourcing Demonstration Cities plays more obvious effects on general trade,mixed trade,and foreign-funded firms,followed by state-owned and private firms,and has no significant effects on processing trade firms;in terms of value chain embedded position,the effect of Service Outsourcing Demonstration Cities is more significant for processing trade and mixed trade,and mainly improves the upstream degree of foreign-funded exporters.In addition,the promotion effect of demonstration cities on China’s value chain upgrading increases with the improvement of firms’ technological levels.This paper is innovative in research perspective,research content,and research method,specifically as follows:From a research perspective,existing studies about value chain upgrading only focus on one perspective and lacks systematic investigation of the effect of service outsourcing,this paper comprehensively focuses on value-added capability,embedded location,and factor income and analyzes how offshore and onshore service outsourcing influence value chain upgrading,which is not only a complement to the research of value chain upgrading but also a beneficial supplement to the research of service outsourcing’ effect.To be specific,firstly,this paper examines systematically the impact mechanism of service outsourcing on the upgrading of the manufacturing value chain from the perspective of value and location,and the heterogeneous impact in different industries in different countries.Secondly,considering that value chain upgrading often leads to income distribution inequality,this paper investigates the influence of service outsourcing on manufacturing value chain upgrading from factors of labor,that is,the influence of service outsourcing on the value-added ability and embedded position of labor factors in the global value chain.It provides a new perspective to analyzing the impact of service outsourcing on the upgrading of the global value chain.Finally,this paper innovatively uses the quasi-natural experiment of Service Outsourcing Demonstration Cities in 2009 and studies the policy effect from the perspective of value-added capability enhancement and embedded location improvement of manufacturing enterprises’ value chains.In terms of research content,as existing research lacks a systematic framework of service outsourcing and value chain upgrading,this paper builds indicators of value chain upgrading and service outsourcing from different dimensions,thoroughly checks the effect of service outsourcing on manufacturing value chain upgrading and its mechanism combined with theoretical analysis and empirical research,evaluates practical effects of industrial policies based on the general conclusion.To be specific,first of all,this paper systematically constructs indicators of service outsourcing and value chain upgrading according to the definition of service outsourcing and value chain upgrading.And then comprehensively analyzes dynamic changes in China’s service outsourcing,specialization,and embedded position in the global value chain from 1995 to 2018 by the heterogeneity of intermediate sources and trade modes.Secondly,the paper tries to construct a conceptual model of the impact of service outsourcing on manufacturing value chain upgrading and puts forward relevant research assumptions to empirically test the impact of service outsourcing on value-added capability upgrading and embedded location improvement in the value chain.Thirdly,the paper sets up the measurement model of the labor share and labor embedded index of the global value chain.Using the model,we analyze the current characteristics and dynamic changes of value-added capacity and embedded position of the manufacturing value chain from the perspective of the labor share and examines the effect of service outsourcing on the share of domestic labor reward in export and labor forward production length both from international and domestic perspectives.Finally,based on the implementation of the policy,this paper studies the mechanism of Service Outsourcing Demonstration Cities affecting the value chain upgrading of manufacturing enterprises,the upgrading path,and other issues.With regard to research methods,using Panel Model,Instrumental Variable method,Difference-in-Difference,mediation effect model,and trade decomposition method based on the input-output table,this paper accurately investigates the impact and mechanism of service outsourcing on manufacturing value chain upgrading in different dimensions.Firstly,considering possible reverse causality,this paper adopts Two-Stage Least Squares(2SLS)and two-step Gaussian Mixed Model(GMM),so as to accurately estimate the impact of service outsourcing on the manufacturing value chain upgrading.Secondly,in order to further overcome the endogeneity problem in empirical estimation,the paper examines the policy effect of Service Outsourcing Demonstration Cities on manufacturing value chain upgrading in different dimensions by Difference-in-Difference method with the establishment of Service Outsourcing Demonstration City,which is a quasi-natural experiment.Thirdly,this paper decomposes the global value chain according to Inter-Country Input-Output Tables by World Input-Output Database(WIOD),which exploits the forward decomposition method and builds indicators of domestic Labor Value Added Rate based on added value decomposition model.Meanwhile,using average production length,we construct a country’s Labor Production Length Value and investigate the share of domestic labor reward and value chain embedded position.