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Competition and the Location of Overseas Assembly

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  • Deborah Swenson

    (Department of Economics, University of California Davis)

Abstract

How does international competition affect overseas outsourcing? While it is commonly believed that international competition enables firms to desert high cost countries in favor of low wage locations, the frequency of such responses may be reduced if the movement of outsourcing activities involves sunk costs. To put these factors in perspective, I study the production decisions of participants in the U.S. overseas assembly program (OAP). A number of interesting regularities emerge. First, the strong positive effect of prior participation on current OAP participation probabilities suggests that sunk costs influence outsourcing choices. Such production persistence is especially strong among foreign assemblers who are responsible for completing a large percentage of value-added. Second, increases in own-country costs and declines in competitor-country costs reduce participation probabilities. In addition, while these persistence and cost effects characterize all overseas assembly choices, these effects are much larger for outsourcing in developing countries. Finally, outsourcing responses appear to reflect differences in “market thickness”, as cost sensitivity generally rises with competitor presence. Taken together, these observations provide empirical support for modeling approaches that feature search costs and partner availability as determinants of outsourcing decisions.

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Bibliographic Info

Paper provided by University of California, Davis, Department of Economics in its series Working Papers with number 638.

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Length: 30
Date of creation: 27 Nov 2006
Date of revision:
Handle: RePEc:cda:wpaper:06-38

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References

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  1. Grossman, Gene & Helpman, Elhanan, 2002. "Outsourcing in a Global Economy," CEPR Discussion Papers 3165, C.E.P.R. Discussion Papers.
  2. J. Bradford Jensen & Andrew Bernard & Peter Schott, 2005. "Survival of the Best Fit: Exposure to Low-Wage Countries and the (Uneven) Growth of U.S. Manufacturing Plants," Working Papers 05-19, Center for Economic Studies, U.S. Census Bureau.
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  4. Campa, Jose M., 2000. "Exchange rates and trade: How important is hysteresis in trade?," IESE Research Papers D/427, IESE Business School.
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Cited by:
  1. Yamashita, Nobuaki, 2011. "Production sharing and trade flows: A comparative analysis of Japan and the US," Journal of Asian Economics, Elsevier, vol. 22(5), pages 383-397, October.
  2. João Amador & Sónia Cabral, 2014. "Global Value Chains: Surveying Drivers, Measures and Impacts," Working Papers w201403, Banco de Portugal, Economics and Research Department.

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