Outsourcing Versus FDI in Industry Equilibrium
Gene M. Grossman
Princeton University - Woodrow Wilson School of Public and International Affairs; Princeton University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)
Harvard University - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)
Harvard Institute Research Working Paper No. 1965
We study the determinants of the extent of outsourcing and of direct foreign investment in an industry in which producers need specialized components. Potential suppliers must make a relationship-specific investment in order to serve each prospective customer. Such investments are governed by imperfect contracts. A final-good producer can manufacture components for itself, but the per-unit cost is higher than for specialized suppliers. We consider how the size of the cost differential, the extent of contractual incompleteness, the size of the industry, and the relative wage rate affect the organization of industry production.
Number of Pages in PDF File: 16
Keywords: Outsourcing, Direct Foreign Investment, Multinational Corporations, Imperfect Contracting, Intra-industry Trade
JEL Classification: F2, F23, L22, D23working papers series
Date posted: October 6, 2002
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