Global Sourcing of a Complex Good

44 Pages Posted: 1 Nov 2011

See all articles by Johannes Van Biesebroeck

Johannes Van Biesebroeck

K.U.Leuven; Centre for Economic Policy Research (CEPR)

Lijun Zhang

University College of the Fraser Valley

Multiple version iconThere are 2 versions of this paper

Date Written: October 2011

Abstract

We analyze a firm that produces a final good from multiple intermediates that can each be sourced domestically or from a low-wage country. The model explicitly incorporates that sourcing decisions of intermediates are interdependent. Equilibrium predictions depend crucially on a key modeling assumption--the nature of the trade friction that foreign production has to overcome. If production abroad involves a fixed cost, offshoring one intermediate unambiguously facilitates offshoring of other intermediates. However, if production abroad involves incomplete contracts, offshoring one intermediate almost always makes it more difficult to offshore others. We illustrate that the pattern in prices at which successive automotive parts are imported into the U.S. accords better with the predictions of the incomplete contracting model, except for a few countries with the best governance indicators.

Keywords: FDI, Outsourcing, property rights

JEL Classification: D23, F12, L23

Suggested Citation

Van Biesebroeck, Johannes and Zhang, Lijun, Global Sourcing of a Complex Good (October 2011). CEPR Discussion Paper No. DP8614. Available at SSRN: https://ssrn.com/abstract=1952479

Johannes Van Biesebroeck (Contact Author)

K.U.Leuven ( email )

Naamsestraat 69
B-3000 Leuven
Belgium
+3216326793 (Phone)
+3216326796 (Fax)

HOME PAGE: http://www.econ.kuleuven.be/public/N07057/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Lijun Zhang

University College of the Fraser Valley ( email )

33844 King Road
Abbotsford, British Columbia V2S 7M8
United States

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