The study provides a survey on recent theories on fragmentation of production across borders. Theory does not provide an unambiguous determination of the distribution effects of outsourcing, and the aggregate welfare effects are not easy to estimate empirically. For Austrian manufacturing industries the share of Eastern countries in imports increased by 6.8 percent p. a., that of exports by about 6.4 percent p. a. on average between 1990 and 1998. During the same period outsourcing to the East in terms of Austrian gross production grew by 10.7 percent p. a. which was mainly due to a substitution of domestic and third-country (non-East) inputs rather than to increased fragmentation. The econometric estimates indicate that outsourcing to the East significantly improves domestic growth in total factor productivity and markedly increases domestic employment of high-skilled relative to low-skilled labour while mandated wage regressions lead to the conclusion that in the presence of perfect factor markets wages would be lower for the low-skilled workers. The negative labour market effects from outsourcing to the Eastern countries on the volume of employment are small. The most important impact will be on the structure of employment and wages (low-skilled versus high-skilled labour). Policies towards higher wage flexibility and inter-sectoral mobility of workers could have some moderating effects on employment losses, especially for low-skilled workers. Economic policy should support structural change which gets an additional impetus from outsourcing.