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Outsourcing vs FDI in Oligopoly Equilibrium

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  • Dermot Leahy
  • Catia Montagna

Abstract

Abstract We consider the make-or-buy decision of oligopolistic firms in an industry in which final good production requires specialized inputs. Factor price considerations dictate that firms acquire the intermediate abroad, by either producing it in a wholly owned subsidiary or outsourcing it to a supplier who must make a relationship-specific investment. Firms’ internationalization mode depends on cost and strategic considerations. Crucially, asymmetric equilibria emerge, with firms choosing different modes of internationalization, even when they are ex ante identical. With ex ante asymmetries, lower cost producers have a stronger incentive to vertically integrate (FDI), while higher cost firms are more likely to outsource. Externalisation contre FDI (Foreign Direct Investment) en équilibre oligopolistique Résumé Cet article concerne la décision de fabriquer ou d'acheter des entreprises oligopolistiques dans une industrie dans laquelle la bonne production finale nécessite des intrants spécialisés. Les considérations de coût du facteur de production obligent les entreprises à acquérir les intermédiaires à l’étranger, soit par leur production dans une filiale en propriété exclusive, soit par externalisation vers un fournisseur qui doit faire un investissement spécifique à la relation. Le mode d'internationalisation des entreprises dépend de considérations de coût et de stratégie. Des équilibres asymétriques émergent de manière critique, les entreprises choisissant différents modes d'internationalisation même lorsqu'elles sont ex ante identiques. Avec des asymétries ex ante, les producteurs à faible coût tendent plus facilement vers l'intégration verticale (FDI), tandis que les entreprises à coût élevé tendent plutôt vers la pratique de l'externalisation. Subcontratación versus inversión extranjera directa (IED [FDI]) en el equilibrio de un oligopolio Résumén Analizamos la decisión de manufactura o compra en compañías oligopolísticas en una industria en donde la producción final de bienes requiere entradas especializadas. Consideraciones sobre el factor precio hacen que las firmas adquieran el intermedio en el extranjero, ya sea elaborándolo en un subsidiario 100% suyo o subcontratándolo a un proveedor quien debe realizar una inversión en base a una relación específica. El modo de internalización de las firmas depende de consideraciones de coste y estratégicas. De forma crucial, equilibrios asimétricos emergen, con firmas eligiendo diferentes modos de internalización, incluso cuando son idénticas ex ante. Con asimetrías ex ante, los productores de bajo coste tienen un incentivo mayor para integrarse verticalmente (IED [FDI]), mientras que es más probable que las firmas de alto coste usen la subcontratación.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Spatial Economic Analysis.

Volume (Year): 4 (2009)
Issue (Month): 2 ()
Pages: 149-166

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Handle: RePEc:taf:specan:v:4:y:2009:i:2:p:149-166

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Related research

Keywords: Outsourcing; foreign direct investment; trade liberalization; oligopoly; F12; F23; L13; L14;

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Cited by:
  1. Monika Mrázová & J. Peter Neary, 2012. "Selection effects with heterogeneous firms," LSE Research Online Documents on Economics 51521, London School of Economics and Political Science, LSE Library.
  2. Dermot Leahy & Catia Montagna, 2010. "Strategic Investment And International Outsourcing In Unionised Oligopoly," Dundee Discussion Papers in Economics 231, Economic Studies, University of Dundee.

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