Fragmentation in International Trade: Manufacturing vs Services

Abstract

The outsourcing boom being observed in India is actually a part of a much bigger worldwide phenomenon of international fragmentation in production and trade. Outsourcing of manufacturing parts has been going on for quite some time, whereas outsourcing of services is a relatively recent phenomenon enabled by the huge reduction in costs of telecommunication and computerization. A key question that arises is whether there is any intrinsic difference in the nature of services outsourcing compared to manufacturing since both represent international trade in intermediates and both essentially take place to arbitrage international differences in costs. This paper explores the inherent difference between outsourcing of services and manufactures theoretically. Both services and manufacturing outsourcing are modeled in at the individual firm level and an attempt is made to identify and conceptualize differences and similarities in the factors underlying outsourcing of services and manufacturing. This would help determine the kind of scenarios in which services versus manufacturing outsourcing would occur and their economic impact.

Keywords: Outsourcing, Services, Fragmentation, Theory of the firm

JEL Classification: F11