This paper investigates the role of exchange rates in determining the level and/or location of offshoring based on industry level data from Sweden over the years 1995 to 2005. A measure of offshoring is generated using Swedish input-output tables together with the bilateral trade data. The empirical model of offshoring is then estimated using Fixed Effects Poisson (Quasi Maximum likelihood) estimation technique with standard errors clustered at industry-country level.
Over all, the results show that depreciation of the Swedish kroner, both against the US dollar and the currency of Sweden’s trading partners has a statistically significant negative effect on offshoring from Sweden. This holds true for the nominal, real and real effective exchange rates. On the other hand, depreciation of the real and real effective exchange rates of the currency of the foreign country, both against the US dollar and Swedish kroner, does not appear to have a statistically significant effect on offshoring although the theoretically expected positive sign is observed. An exception to this is the nominal exchange rate which is found to have a statistically significant positive association with offshoring in all the cases. These results are also supported by regressions based on industry specific exchange rate.
Regression results with exchange rate vs. industry dummy interaction terms indicated the existence of heterogeneity in industry responses to movements in exchange rate. Less contract intensive industries tend to be more responsive to movements in exchange rate of the foreign country than more contract intensive industries. In general, the regression results are pretty much the same for different types of exchange rates and are robust to variants of specifications. Besides, all the control variables in the regressions appeared to have the theoretically expected signs although some are not statistically distinguishable from zero.
These findings on the role of foreign exchange rate movements on offshoring have clear policy relevance both for the home and host economies in terms of their overall exchange rate management and/or choice of exchange rate regime. According to the results of this paper, a strong SEK against the currencies of the major offshore destination economies and/or the US dollar, on top of expensive costs of production at home, will facilitate reallocation of production away from Sweden to foreign countries.
2010. 1-26 p.