Outsourcing and Offshoring to Eastern Europe

Europe is reorganizing its international value chain. I document these changes in Europe’s interna-tional 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 lev-els of corruption as well as improvements in the contracting environment in Eastern Europe are affect-ing the level of intrafirm imports from that region. These factors also favor outsourcing over offshor-ing. 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 organiza-tional choice