How Can Service Outsourcing Drive the Upgrading of Manufacturing Value Chain Status—A Systematic Examination Based on Cross-country and Chinese Samples

In the context of the policy objective of achieving industrial value chain upgrading and the reality that service outsourcing has become an important trend in global manufacturing development, it is important to explore how service outsourcing contributes to achieving value chain status upgrading in China's manufacturing industry. Based on the latest edition of OECD Inter-Country Input-Output tables (ICIO) from 1995 to 2018, this paper systematically examines the impact effects and mechanisms of offshore and onshore service outsourcing on the upgrading of a country's manufacturing value chain status. Further, we select a Chinese sample for comparative analysis. We find that: (1) Service outsourcing facilitates a country's manufacturing industry to move downstream in the relative links in the industrial chain. Offshore service outsourcing plays a more important role in promoting the upgrading of the embedded position in the global value chain. (2) Mechanistic analysis reveals that outsourcing of services drives the downstream movement of a country's value chain links through three channels: replacing imports of intermediate goods, reducing the number of cross-border purchases of intermediate goods, and increasing productivity, especially labor productivity. Also, service outsourcing significantly enhances the extent to which onshore outsourcing of services influences the embeddedness of value chains through headquarters economies and absorptive capacity. (3) Heterogeneity analysis shows that the impact of services outsourcing on changes in manufacturing embeddedness weakens over time and at lower income levels. Besides, the impact has differential effects across technology sectors and service types. (4) Further analysis using the Chinese sample shows that the results are generally consistent with the cross-country sample. The development of offshoring and onshoring in China's manufacturing industry also reduced the upstream degree of the manufacturing industry and thus promoting the upgrading of the embedded position in the global value chain. Moreover, the upgrading effect of offshoring is greater than that of onshoring. This study provides theoretical and empirical references for China to promote the upgrading of manufacturing value chains through the vigorous development of the service outsourcing industry under the development of new trade patterns and new models.