Global Sourcing of Complex Production Processes

45 Pages Posted: 14 Nov 2010

See all articles by Christian Schwarz

Christian Schwarz

University of Applied Sciences Duesseldorf

Jens Suedekum

Heinrich-Heine-University Duesseldorf, Duesseldorf Institute for Competition Economics (DICE); Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); Institute for the Study of Labor (IZA)

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Abstract

We develop a theory of a firm in an environment with incomplete contracts. The firm's headquarter decides on the complexity, the organization, and the global scale of its production process. Specifically, it decides: i) on the mass of symmetric intermediate inputs that are part of the value chain, ii) if the supplier of each component is an external contractor or an integrated affiliate, and iii) if the supplier is offshored to a foreign low-wage country. Afterwards we consider a related scenario where the headquarter contracts with a given number of two asymmetric suppliers. Our model is consistent with several stylized facts from the recent literature that existing theories of multinational firms cannot account for.

Keywords: multinational firms, outsourcing, intra-firm trade, offshoring, vertical FDI

JEL Classification: F12, D23, L23

Suggested Citation

Schwarz, Christian and Südekum, Jens, Global Sourcing of Complex Production Processes. IZA Discussion Paper No. 5305, Available at SSRN: https://ssrn.com/abstract=1708751

Christian Schwarz (Contact Author)

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Jens Südekum

Heinrich-Heine-University Duesseldorf, Duesseldorf Institute for Competition Economics (DICE) ( email )

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Germany

Centre for Economic Policy Research (CEPR) ( email )

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CESifo (Center for Economic Studies and Ifo Institute) ( email )

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Germany

Institute for the Study of Labor (IZA)

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Bonn, D-53072
Germany

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