From Local to Global: Offshoring and Asset Prices.

This article investigates how the potential to offshore production influences the cost of capital and risk premia across U.S. manufacturing industries. It introduces a novel industry-level measure of labor offshorability, constructed from occupation-level task data weighted by employment and wages, and finds that industries with low offshoring potential exhibit significantly higher excess stock returns compared to those with high offshoring potential. Empirical evidence links this offshorability premium to import competition from low-wage countries, showing that offshoring mitigates risks associated with foreign competition by enabling cost reductions and market share protection. A two-country dynamic trade model, distinguishing a high-wage (West) and low-wage (East) country, incorporates offshoring decisions and successfully replicates key empirical patterns, including the positive return spread between low and high offshorability industries and its amplification with import penetration. The model further predicts and the data confirm that offshoring lowers profit volatility, that the offshorability premium increases with consumer price sensitivity, and that the associated investment strategy has a positive consumption beta, underscoring offshoring’s role as a significant factor in industry risk and asset pricing.