OUTSOURCING TO CEE COUNTRIES AND SPANISH INDUSTRIAL EMPLOYMENT: THE SPANISH-TURKEY TRADE RELATIONSHIP IN 1993-2003

The aim of this paper is to investigate the effect of foreign outsourcing, focusing on CEE countries and especially on Turkey, on the level of employment for Spain. The rising economic integration has increased not only trade in final goods but also the flows of intermediate goods, as a result of the fragmentation of production by multinational firms and/or the search for new and cheaper providers. While some see this phenomenon as a threat to domestic employment, it also represents a chance to reduce costs, increase flexibility and open new markets, all of which can raise sales and employment. We study empirically this impact for Spain, a country that joined the EEC in 1986, becoming a low-cost location for many firms, and after twenty-years of development it is now experiencing a strong increase of outsourcing to Central and Eastern European countries with a specific analysis of the case of Turkey. The trade relationship between Turkey and Spain has been reinforced significantly in the last years and has concentrated in a few sectors, with important relative increase in imports from particular sectors as Agriculture, Textile, Leather goods, Manufacture of footwear, Manufacture of cork and wood, Manufacture of articles of paper and cardboard, Manufacture of rubber and plastic products, Manufacture of electronic components, Manufacture of motor vehicles, Building and repairing of ships and boats, Manufacture of furniture. These are medium-low technology sectors where Spain was relatively-specialized only a few years ago, however production in these sectors is moving away as a result of more intensive trade relationships and globalization. Following recent literature on the topic, like Feenstra and Hanson (1999), Strauss-Kahn (2003) and Hijzen et al. (2005), outsourcing is measured by intra-industrial imports of inputs, using domestic and import – use matrices of input-output tables, for 92 Spanish manufacturing industries for the period 1993 to 2003. As we are interested in outsourcing to particular countries and groups of countries, we use a similar methodology to Egger and Egger (2003, 2005), Falk and Wolfmayr (2005), and Geishecker (2005), and calculate outsourcing to those countries using our measure of outsourcing and data on imports from the National Customs Agency. These measures are included in a labour demand function estimated using annual data from the Industrial Survey (Spanish Statistics Institute) on worked hours, added value (net sales minus intermediate purchases) and labour cost. The most appropriate method of estimation, for this panel data with a lagged dependent variable and endogenous and predetermined variables among the regressors, appears to be the GMM system technique (SYS-GMM). Our aim now is to do the same estimation with Turkish data. We find that the effect of outsourcing differs with industry characteristics, being negative and significant for medium-high-tech industries and not significant for low-tech sectors. Comparing the effect for EU new members and candidates and Turkey our results show a greater negative impact from outsourcing to CEE countries, especially Turkey, on Spanish industrial employment. We also calculate different measures of vertical specialization, extending the original concept of Hummels et al. (2001), using the domestic and import use matrices and data on Spanish exports. Different Vertical specialization measures have then been included in a labour demand function using 1 Facultad de Ciencias Económicas y Empresariales de Albacete, Universidad de Castilla – La Mancha, Plaza de la Universidad no 1, 02071, Albacete (Spain). Nuria.gomez@uclm.es.