Offshoring Bias in Japan's Manufacturing Sector

As the manufacturing sectors of developed economies increasingly outsource to developing economies, a serious measurement problem, or "offshoring bias" (Houseman et al. 2011), may arise. If a manufacturing industry or firm procures many parts and components from developing economies at exceptionally low prices, taking advantage of special supplier networks or efficient foreign affiliates as an example, and if these low prices are not correctly accounted, the productivity of this industry will be overestimated. Using Japan's I-O tables and price data for imported and domestic products, we estimate the offshoring bias by examining the differences in estimates of import use in the I-O tables based on direct data and estimates derived from the assumption that an industry's imports of each input, relative to its total demand, are the same as the economy-wide imports relative to total demand (as is assumed in the I-O tables for the United States). We also detail the types of data used and their collection method by METI. Our main findings are as follows. 1) In the period 1995-2008, the import price-domestic price ratio of many commodities, including important parts and components, declined sharply. For instance, in the case of integrated circuits and semiconductor devices, the relative prices declined by 33 % and 28 %, respectively. 2) Since the share of imported inputs in total inputs differs across sectors, we found quite large negative or positive offshoring biases in some sectors. For example, in sectors such as aircrafts, liquid crystal elements, and integrated circuits, the negative offshoring bias of intermediate input growth is more than 2.5 % and the positive offshoring bias of total factor productivity (TFP) growth is more than 1.7 %. On the other hand, in sectors such as cellular phones, radio and television sets, and other photographic and optical instruments, the positive offshoring bias of intermediate input growth is more than 3.3 % and the negative offshoring bias of TFP growth is more than 1.9 %.