A Model of Outsourcing and Foreign Direct Investment

12 Pages Posted: 2 May 2007

See all articles by Frank Stähler

Frank Stähler

University of Tuebingen - Department of Economics; University of Adelaide - School of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Abstract

This paper presents a model in which two firms may use foreign direct investment or outsourcing in order to reduce the production cost of an intermediate input. Outsourcing requires training which is costly and creates a positive spillover. The paper shows that the equilibrium depends on the level of training costs. If they are high, only bilateral outsourcing is possible in equilibrium. If bilateral outsourcing is incomplete, it will not change prices compared to no outsourcing. If they are low, only complete outsourcing is possible. If complete outsourcing is unilateral (bilateral), the price increases (decreases) with the degree of spillovers.

Suggested Citation

Stähler, Frank, A Model of Outsourcing and Foreign Direct Investment. Review of Development Economics, Vol. 11, No. 2, pp. 321-332, May 2007, Available at SSRN: https://ssrn.com/abstract=982729 or http://dx.doi.org/10.1111/j.1467-9361.2007.00414.x

Frank Stähler (Contact Author)

University of Tuebingen - Department of Economics ( email )

Mohlstrasse 36
D-72074 Tuebingen, 72074
Germany

HOME PAGE: http://www.frank-staehler.de

University of Adelaide - School of Economics ( email )

Adelaide SA, 5005
Australia

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

Poschinger Str. 5
Munich, DE-81679
Germany

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