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1、；ADB InstituteADBI Working Paper SeriesINTERNATIONAL OUTSOURCING, ENVIRONMENTAL COSTS, AND WELFAREJai-Young Choi and Eden S. H. YuNo. 848June 2018Asian Development Bank InstituteChoi and YuADBI Working Paper 848where Di (/ =1, 2) is the consumption of the two goods, and U is a strictly quasiconcave
2、utility function, t/(D,D2) U. Note that the expenditure function is derived by minimizing the expenditure subject to a utility constraint.3. OUTSOURCING, ENVIRONMENTAL COSTS, INTERNALIZATION, AND WELFAREThe economys budget constraint stipulates that the total value of expenditure is determined by th
3、e value of national income:E(P，U) = I,(5)where /= pX、+ X2denotes the national income expressed in terms of good 2. free trade is assumed so that the domestic prices and the international prices of the traded goods are synchronized at the ratio of p. Totally differentiating (5), we obtain the express
4、ion for the welfare effect of outsourcing occurring in the two sectors (dW).dW = EydU = pdX +dX2 -Exdp-bxd -b2dA2 一(4 一1)曲一(4 -l)db2(6)where Ep =dE/ dp = and E= D- denotes the excess demand in sector 1.Now suppose that an autonomous outsourcing takes place via the firms in sector 1, i.e., A1, 四 0, A
5、2 = 1, and dA = 0. Note that the outputs of the two industries are directly affected by the outsourcing and indirectly affected by the adjustment in the terms of trade, as consequent to the outsourcing. We may postulate thatx, = Xj(A，p)so that也与+阳dp ,/=1)2.d 朋 dp dA1The first term (on the right-hand
6、 side) captures the direct output effect of outsourcing, and the second term indicates the indirect output effect caused by a change in the terms of trade.Now, we are ready to analyze the welfare effect of outsourcing in sector 1. Differentiating (6) with respect to A and using (7), we obtain the ex
7、pression for the welfare effect of the outsourcing occurring in sector 1:8 This assumption is made solely for simplicitys sake. The analysis of outsourcing in sector 2 simply involves the same procedure (as that in the present case of outsourcing in sector 1). When outsourcing occurs in both sector
8、1 and 2, the total effect of outsourcing is the summation of the relevant effects of the two sectors.ADBI Working Paper 848Choi and YupdX、也一1)3dA 11 A(8)(8)= SX| + 双2 _(a _)而“ +(PSX十以2 _ E)dpM dA1 11 d dp dp X dSince the terms of the trade effect could distract the present analysis from focusing on
9、the environmental effects of outsourcing, we assume that the international commodity markets are competitive, and hence 中e outsourcing country (North) is a price taker of the two final goods, i.e., dpidAi =0. Then, (8) reduces to,TI7 pdX, dX. z /人、曲dW 1 +-b -(A -1)_L 二i id d ddA、which can be rewritt
10、en asdW + 工1”乙1阳 + %() + (a2乙2 + &2匕) b(A 1)的 =1 I 以必dAd(+ 46Ml + rdK)-(wd + rdK、) 8 缶 二 曲=a -b -(A -1)111db、=a -bi 1(9)Equation (9) shows the various effects of outsourcing upon the welfare of the country: the marginal revenue product of the outsourced goods and services )minus the price of the out
11、sourced goods and services (, as coupled with the change in the price of the outsourced goods and services (4- 1)(血/阴), Without fully internalizing environmental costs, outsourcing depletes environment quality during stage I; but in stage II, the South enacts environmental regulations to account for
12、 the environmental costs, thereby increasing the price of outsourced goods and service (4- 1)(d/d4) * 0). Hence, in stage II, b；= & + (AT)(db“dAi) is regarded as the new exogenously given parameter by the Northern outsourcing firms.Equation (9) shows that, in the absence of environmental costs, (41)
13、(曲/。%)=0), b = b . Therefore, outsourcing should occur until ai= bi (or ai = b ), where aW/clA 11=0. This implies that outsourcing necessarily enhances the welfare of the outsourcing country and attains the optimum resource allocation for the world as well. Hence, the following proposition:Propositi
14、on 2. In the absence of induced environmental cost, outsourcing enhances the welfare up to the optimal level of both the country and the world. This model can be extended to a large country case where the terms of trade are variable. See for example, Choi and Yu (1985).Choi and YuADBI Working Paper
15、848However, when environmental costs exist, (4- 1)(d/d4) 0), the actual cost ofoutsourcing paid by the Northern firms in Stage II ( ) depends on the degree of internalization of the environmental costs, as subject to the regulations of the South.Specifically, based on the extent of internalization,
16、the marginal cost of outsourcing to the outsourcing country (Z? ) in Stage II can be positioned somewhere between the twoextremei.e., bi extremei.e., bi vluer namely, under no internalization and 5： under full-internalization,i iCpnsidering Stage III; there *ill be a full-internalization of the envi
17、ronmental costs,f 4 = b + (A-1)(c/b/c/4i) = bx . Outsourcing occurs up to the extent where ai = and dWdAi = 0 in equation (9). In this case, the volume of outsourcing obviously shrinks compared with the case of Stage I (where, due to no internalization of the environmental costs, outsourcing occurs
18、up to where ai= bi). However, outsourcing under the full-internalization in Stage III determines the optimal level of outsourcing for the world, ensuring efficient world-wide resource allocation (including attaining quality environment). In contrast, when the environmental costs are not accounted fo
19、r (as in stage l)2 =h and hence outsourcing occurs up to the level of ai = bi, implyipa over-outsourcing (vis-a-vis the optimum level of outsourcing that occurs at a =bJ). Here, it is our view that the over-outsourcing (under no internalization) in stage I is a major cause of massive environmental d
20、amage to the South (e.g., the PRC). Then, what is the current state of internalization in the North-South outsourcing? The answer can be inferred from the presently stagnating or even regionally deteriorating environmental quality in the South, as frequently reported by the mass media (see Note 4).
21、That is, North-South outsourcing is presently in a state of the partial internalization of its environmental costs. Under such a partial internalization (in Stage II), the actual price of the outsourced goods and services (:)i& higher (lower) than those under no internalization (full-internalization
22、), i.e., b b c = bf. i i iIn the present case, over-outsourcing still occurs and creates an environmental burden for the South, although the degree of over-outsourcing is less than that under nointernalization. Then, another question may arise; why does North-South outsourcing remain at a level of p
23、artial-, rather full-internalization (under which the environmental problem would be resolved)? There are several possible explanations: Firstly, the economies of the vendor countries in the South are still in the infant stages of development, and hence, are in need of international liquidities and
24、Northern technologies to pursue their primary goals of economic development. Therefore, they are reluctant to employ a potent policy that could totally discourage outsourcing by the North; Secondly, as the prices of outsourced goods and services go up due to the environmental regulations implemented
25、 by the South in stage II, the Northern firms resort to counter-measures to lower the costs of outsourcing, such as vendor-country diversification, partial outsourcing, insourcing, or resourcing. When facing rising outsourcing costs due to the internalization of environmental costs, as in stage II,
26、the outsourcing firms of the North opt to search for a new optimal strategy to lower outsourcing costs. Among a few alternative strategies are: (a) shifting their outsourcing post(s) to other vendor countries in the South where the costs of outsourcing are lower than the current vendor countries. Th
27、is strategy, leading to vendor country diversification, as well as slowing the rate at which the price of outsourced goods and services is rising, can be observed in the migration of US and EU firms from the PRC to other vendor countries in the South (where the environmental problems are less severe
28、 and the costs of outsourcing are lower than in the PRC; i.e., Cambodia, Dominican Republic, Ghana, India, Indonesia, Malaysia, the Philippines, Rwanda, and Viet Nam); (b) bringing their outsourcing post(s) back to the home country in the North through insourcing or resourcing; (c) adopting a partia
29、l outsourcing strategy by mixing outsourcing and insourcing strategies.Thirdly, in stage II, theChoi and YuChoi and YuADBI Working Paper 848increasing price of outsourced goods and services induces the entry of new vendor firms into the outsourced industry; thus, the increased competition among vend
30、ors hinders prices from rising in the outsourcing market. Hence, we can state the following proposition:Proposition 3. In the presence of the environmental costs of outsourcing, the optimal outsourcing, as ensuring an environment acceptable to the world community, can be obtained under the full-inte
31、rnalization of the environmental costs. However, if the environmental costs are not fully internalized, over-outsourcing and environmental deterioration occurs in the vendor country. In this case, the level of over-outsourcing and the degree of environmental deterioration vary inversely with the deg
32、ree of the internalization, as bounded by no versus full-internalization.Figure 1: Gains and Losses from Internalization of EnvironmentalCosts of OutsourcingDa = %= PFaxlA-14 T4z-i4*-1It is obvious that the choice of strategies should determine the future pattern and geography of global outsourcing.
33、 For terminology related to “insourcing, (i.e., “reshoring, backshoring,H and “inshoring), see “Insourcing” and “offshoring” in Wikipedia (internet article (xii) in the References section).Choi and YuADBI Working Paper 848Figure 1 shows the gains and losses from outsourcing for the North and the Sou
34、th in the presence of environmental costs. In the graph, A-1 (or A) denotes the level of outsourcing, and ai = pFA1 L1L1 indicates the demand for (or the marginal revenue product of) 4. Since the outsourcing firms are the price takers of A, they face a perfectly elastic supply curve of 4 at & ( b；)
35、when the environmental costs are not (are) internalized by the South in stage 1 (stage II). In stage I, when outsourcing between the South and the North takes place at the price of equilibrium outsourcing occurs at g and the level of outsourcing is 4 -1. It is clear that the North gains by the area
36、of & b f dg because it pays no environmental cost, and the South loses by the area of & bjhg because it bears the whole burden of the environmental costs. Therefore, the welfare loss occurs to the world by the area of dhg, which represents the deadweight loss caused by the misallocation of resources
37、 due to over-outsourcing. That is, in stage I, the South subsidizes the North in terms of enduring the environmental costs of outsourcing.In stage II, the actual price of the outsourced goods and services (邛)depends on the degree of the internalization of the environmental costs. Under the full-inte
38、rnalization scheme in Stage III, the price is 4f. Thus, the transition from Stage I through Stage II to Stage III entails movement of the equilibrium point from gto d, and hence decreases the level of outsourcing from A -1 to Af -1. As a result, the North loses by a bf dg, the South gains b、hg, and
39、the world gains by dhg owing to the recovery of the deadweight loss of stage I. This confirms that the optimum level of outsourcing to the world community occurs when the environmental costs of outsourcing are fully internalized.Suppose, as of now, the North-South outsourcing industry is in a state
40、of partial internalization (as in stage II), such that, in Figure 1, the price of the outsourced goods and services (5； ) is situated between & and * (i.e., & 心 No Internalization (Stage I)dg-bbhg+b bJ dg1 1-dhg(b) No InternalizationFull Internalization (Stage II) (a)+(b) Net welfare changegd+b hg-b
41、 b* dg +dhg10Choi and YuADBI Working Paper 848Table 2:PolicyEquilibriumGains (+) and Losses from Partial Internalization of Environmental CostsSouthNorthWorld(c) No InternalizationPartial Internalization at the current price of bcge+b b*ig i i 0-b?：eg+eig(d) Partial Internalization at the current pr
42、ice of bc一Full Internalizationed+人勿je i i-hfde i i+dje(c)+(d) Total welfare changege-d+6 b： jeig-b dgeig + dje4. CONCLUSIONSIn recent decades, it has become prevalent in world trade that firms in one country outsource intermediate and/or finished goods or services from vendor firms in other countrie
43、s for the purpose of increasing production efficiency and lowering production costs. It is of note that, while public focus on international outsourcing is mainly directed upon North-South outsourcing, a firms decision to undertake outsourcing can be driven by a host of factors (besides reducing lab
44、or costs). The ultimate aim thereof is to enhance the profitability and capability of the firms operation. To illustrate, both the US and EU countries have outsourced materials and goods from each other. The PRC outsources a variety of intermediate goods (such as crude petroleum, integrated circuit,
45、 iron ore, gold, and cars) from Australia; Germany; Hong Kong, China; Japan; the Republic of Korea, among others, while shifting its outsourcing of garments, apparels, toys, foot wares, and tools to other developing countries in Asia, Latin America, and Africa.The evolution of these outsourcing patterns reveals that (a) outsourcing can occur universally among trading countries, whereby its direction can be of any type (North to South, North