Immigrant employment and the contract enforcement costs of offshoring

Offshoring continues to be an important dimension of firms’ internationalization choices. However, offshoring also increases contract enforcement costs by inhibiting the coordination and monitoring of performance. Immigrant employees may reduce such costs through their specific knowledge of the employer, their country of birth and access to foreign networks. In this paper, we investigate the role of immigrant employees within firms on firm offshoring, employing rich administrative Swedish microlevel data that include specific information about the characteristics of employees, manufacturing firms and their bilateral offshoring. Our results support the hypothesis that immigrant employees increase offshoring by lowering contract enforcement costs. Hiring one additional immigrant employee is linked to a relatively larger increase in offshoring at the intensive than the extensive margin, on average. The association to offshoring is considerably stronger for skilled immigrant employees and for contract and R&D intensive offshoring. Instrumental variable estimations demonstrate qualitatively similar results, while a placebo test with randomized immigrant employment does not generate any link between immigrants and offshoring.