Service Links' Effect On Developing Countries In Outsourcing

The concept of "Production Blocks" and "Service Links" were first proposed by Jones and Kierzkowski in 1990, when they did research about the theory fragmentation of production. In the fragmented production model, the cost of the "service links" connecting various "production blocks" is crucial important. It effects the degree of fragmentation of production and the geographical distribution of production blocks in the whole wolrd. However, there were few stduies about service links, and there was not an unified point of view about how to measure the cost and quality of service links.Based on the study of the existing literatures in three aspects:on the theory of the intra-product specializaiton and intra-product trade, the discussion of the factors that effecting outsourcing, as well as the study on the service links related to production and trade, this paper establishes our own study framework about the relationship between service links and outsourcing. In this paper, "service links" in the whole production process are not the factors that we usually term "service", but mean those services that connect and coordinate production blocks which are spread over many regions or countries. They are provided by communication, transportation, information gathering and so on; they mostly include two aspects——transpatation and telecommunication, form part of a related production process.For the production of specific product, there should input service links in order to coordinate various production blocks in different regions or countries, the related cost is called service link cost, which is a part of the whole production cost. The service link cost can be covered by many countries engaged in the production process of this specific product. Except the above two main aspects concerned, there are some other service factors related closely to service links, and these factors are similar among each country. If we call them specific service links, they include trade convenience and business climate.This paper focuses on the analysis of service links connecting production blocks in global production network, comparing the development level of service links in 60 sample countries. We analyze the effect of service links on outsourcing from the developing countries'aspect. We take principal component analysis to evaluated service links index, based on our understanding and definition of service links. We also engage in easy doing business index and government corruption index. In addition, we also take empirical analysis to examine service links' effect.We use the cross-section sample data in 2008, the empirical results show that a developing country's labor cost and service link quality both have significant impact on the scale of segment production outsourcing from developed countries or regions. In the capital/technology intensive manufacture industry, components as the intermediate inputs are effected by service links cost more than by labor cost. So for developing countries, when they have advantage in labor cost, if they could improve the quality of service links they provide, which means reducing service links cost for production, these countries will have more competence to integrate into global production network; when these developing countries with higher labor cost, or labor cost is rising, they also can rely on the improvement of service links and institution condition to offset the negative impact of labor cost.