A New International Division of Labor in Europe: Offshoring and Outsourcing to Eastern Europe

Europe is reorganizing its international value chain. I document
these changes in Europe’s international organization of production
with new survey data of Austrian and German firms investing in
Eastern Europe. I show estimates of the share of intra-firm trade
between Austria and Germany on the one hand and Eastern Europe on
the other. Furthermore, I present empirical evidence of the drivers
of the new division of labor in Europe. I find among other things
that falling trade costs and falling corruption levels as well as
improvements in the contracting environment in Eastern Europe are
affecting the level of intra-firm imports from Eastern Europe. They
are also favoring outsourcing over offshoring. Low organizational
costs of hierarchies and large costs of hold-up (when there are no
alternative investors in Old Europe or no alternative suppliers in
Eastern Europe) are favoring offshoring over outsourcing. Tax
holidays granted by host countries in Eastern Europe also mildly
affect the organizational choice.