Offshoring and Wage Inequality: Theory and Evidence from China

We present a global production sharing model that integrates the organizational choices of offshoring into the determination of relative wages in developing countries, highlighting that offshoring through foreign direct investment raises the demand for skill in the South more than arm's length outsourcing. By leveraging the natural experiment in which China lifted its restrictions on foreign ownership for multinationals upon its accession to the World Trade Organization in 2001, we show that the significant shifts in firm ownership structure in offshoring promote skill upgrading in Chinese processing exports and the relative wage of skilled workers in China's manufacturing sector from 1992 to 2008.