Working paper No. 282: 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. We develop
a heterogeneous firm framework with immigrants and offshoring costs, including technology leakage. In the model, immigrant
employees augment the supervisory services of headquarters and limit technology leakage, thereby reducing contract
enforcement costs. Then, we bring our conjectures to 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 intensity by lowering contract enforcement costs. Hiring one
additional immigrant employee can increase offshoring by up to three percent on average, with the strongest effects found for
skilled immigrant employees.

Hatzigeorgiou, A., Karpaty, P., Kneller, R., & Lodefalk, M. (2016). Do Immigrants Spur Offshoring? Firm-Level Evidence. Ratio Working Paper No. 282. Stockholm: Ratio.