The Role of Public Infrastructure for Firm Location and International Outsourcing
Department of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
Department of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Institute for the Study of Labor (IZA)
CESifo Working Paper Series No. 970
This paper presents a model in which final goods producers outsource intermediate input production. Intermediate inputs are differentiated and their production can be located at home or abroad. The model is used to examine competitive location policy in a (two-country) free trade agreement (FTA). It is shown that national public infrastructure investment has a positive effect on both the number of intermediate input producers and the return to the immobile factor in the home country. International outsourcing from home declines. Opposite effects are triggered in the partner country. In a welfare analysis we characterize national infrastructure policies that aim to maximize national income (net of tax costs) and compare the non-cooperative FTA-equilibrium with optimal policies from an integrated point of view. It is shown when coordination of competitive location policies is useful and when it is not.
Number of Pages in PDF File: 38
Keywords: International Outsourcing, Firm Location, Public Infrastructure, Welfare Effects
JEL Classification: F12, F15, F42, H54working papers series
Date posted: June 26, 2003
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