Outsourcing Versus FDI in Industry Equilibrium

16 Pages Posted: 6 Oct 2002

See all articles by Gene M. Grossman

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); Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Elhanan Helpman

Harvard University - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: August 2002

Abstract

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.

Keywords: Outsourcing, Direct Foreign Investment, Multinational Corporations, Imperfect Contracting, Intra-industry Trade

JEL Classification: F2, F23, L22, D23

Suggested Citation

Grossman, Gene M. and Helpman, Elhanan, Outsourcing Versus FDI in Industry Equilibrium (August 2002). Harvard Institute Research Working Paper No. 1965. Available at SSRN: https://ssrn.com/abstract=336245 or http://dx.doi.org/10.2139/ssrn.336245

Gene M. Grossman

Princeton University - Woodrow Wilson School of Public and International Affairs ( email )

300 Fisher Hall
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Princeton University - Department of Economics ( email )

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

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Munich, DE-81679
Germany

Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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Elhanan Helpman (Contact Author)

Harvard University - Department of Economics ( email )

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Cambridge, MA 02138
United States
617-495-4690 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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