A New International Division of Labor in Europe: Outsourcing and Offshoring 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 intrafirm trade
between Austria or 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 reduced levels of corruption as well
as improvements in the contracting environment in Eastern Europe
are affecting the level of intrafirm imports from that region.
These factors also favor outsourcing over offshoring. In contrast,
low organizational costs of hierarchies and large costs of holdup
(when there are no alternative investors in Old Europe or no
alternative suppliers in Eastern Europe) favor offshoring over
outsourcing. Tax holidays granted by host countries in Eastern
Europe also mildly affect the organizational choice.