Multinational enterprises, service outsourcing and regional structural change

Abstract

This article offers a joint analysis of two phenomena characterising most advanced economies in recent decades: the rise of foreign ownership in manufacturing activities and the pervasiveness of the service economy. The analysis focuses on a specific intersectoral demand-side channel for structural change: the forward linkage established by foreign manufacturing multinational enterprises (MNEs) with service providers through outsourcing in the UK local labour markets. Descriptive evidence shows that service outsourcing by foreign manufacturing plants is notably larger than that of their domestic counterparts. On this basic premise, we estimate the local multiplier effect that foreign manufacturing activity has on service employment. To test our hypotheses, the methodology adopts an instrumental variable approach. Our findings suggest that foreign MNEs in manufacturing can act as a catalyst for regional structural change by stimulating employment in intermediate services via demand linkages. While the composition of this effect seems to be homogeneous in terms of the knowledge content of services, differences are found once the degree of their spatial concentration is accounted for.