Global Sourcing of Complex Production Processes
43 Pages Posted: 1 Sep 2011
Date Written: August 31, 2011
We develop a theory of a firm in an incomplete contracts environment which decides on its complexity, organization, and global scale. Specifically, the firm decides i) how thinly it wants to slice its production process by choosing the mass of symmetric intermediate inputs that are simultaneously combined to a final product, ii) if the supplier of each component is an external contractor or an integrated affiliate, and if that component is offshored to a foreign country. We also consider the case of asymmetric inputs. Our model leads to a rich set of novel predictions about the structure of multinational firms that are consistent with stylized facts from the recent empirical literature.
Keywords: multinational firms, outsourcing, intra-firm trade, offshoring, vertical FDI
JEL Classification: F120, D230, L230
Suggested Citation: Suggested Citation