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Breaking Up Is Hard To Do: Why Firms Fragment Production Across Locations

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  • Teresa C. Fort

Abstract

This paper documents the relative importance of labor cost differences, distance to suppliers, and communication technology in a rm's domestic and foreign sourcing decisions. Using an original dataset of U.S. manufacturers' decisions to contract for manufacturing services, I show that domestic fragmentation: i) is far more prevalent than offshoring; ii) changes rms' opportunity cost to offshore; and iii) is facilitated by communication technology. In contrast, communication technology does not necessarily lead rms to offshore. Firms fragment production to access cheaper labor, and countries that offer signifcant labor cost savings tend not to have the technology infrastructure to support high-tech production.

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File URL: ftp://ftp2.census.gov/ces/wp/2013/CES-WP-13-35.pdf
File Function: First version, 2013
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Bibliographic Info

Paper provided by Center for Economic Studies, U.S. Census Bureau in its series Working Papers with number 13-35.

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Length: 58 pages
Date of creation: Jul 2013
Date of revision:
Handle: RePEc:cen:wpaper:13-35

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Keywords: fragmentation; offshoring; technology; contract manufacturing services;

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References

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  1. Robert Feenstra, 2003. "Integration Of Trade And Disintegration Of Production In The Global Economy," Working Papers 986, University of California, Davis, Department of Economics.
  2. Tomiura, Eiichi, 2007. "Foreign outsourcing, exporting, and FDI: A productivity comparison at the firm level," Journal of International Economics, Elsevier, vol. 72(1), pages 113-127, May.
  3. Russell Hillberry & David Hummels, 2005. "Trade Responses to Geographic Frictions: A Decomposition Using Micro-Data," NBER Working Papers 11339, National Bureau of Economic Research, Inc.
  4. Greene, William, 2010. "Testing hypotheses about interaction terms in nonlinear models," Economics Letters, Elsevier, vol. 107(2), pages 291-296, May.
  5. Richard Baldwin & Anthony Venables, 2010. "Spiders and snakes: offshoring and agglomeration in the global economy," NBER Working Papers 16611, National Bureau of Economic Research, Inc.
  6. Gene M. Grossman & Esteban Rossi-Hansberg, 2008. "Trading Tasks: A Simple Theory of Offshoring," American Economic Review, American Economic Association, vol. 98(5), pages 1978-97, December.
  7. Robert C. Johnson & Guillermo Noguera, 2012. "Fragmentation and Trade in Value Added over Four Decades," NBER Working Papers 18186, National Bureau of Economic Research, Inc.
  8. Robert E. Hall & Charles I. Jones, 1999. "Why Do Some Countries Produce So Much More Output Per Worker Than Others?," The Quarterly Journal of Economics, MIT Press, vol. 114(1), pages 83-116, February.
  9. Fariha Kamal & Brent R. Moulton & Jennifer Ribarsky, 2013. "Measuring “Factoryless” Manufacturing: Evidence From U.S. Surveys," Working Papers 13-44, Center for Economic Studies, U.S. Census Bureau.
  10. Michael P. Keane & Susan E. Feinberg, 2006. "Accounting for the Growth of MNC-Based Trade Using a Structural Model of U.S. MNCs," American Economic Review, American Economic Association, vol. 96(5), pages 1515-1558, December.
  11. Ai, Chunrong & Norton, Edward C., 2003. "Interaction terms in logit and probit models," Economics Letters, Elsevier, vol. 80(1), pages 123-129, July.
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Cited by:
  1. Franz-Josef Bade & Eckhardt Bode & Eleonora Cutrini, 2012. "Spatial fragmentation of industries by functions," Working Papers 39-2012, Macerata University, Department of Studies on Economic Development (DiSSE), revised Feb 2012.
  2. Monarch, Ryan & Park, Jooyoun & Sivadasan, Jagadeesh, 2013. "Gains from Offshoring? Evidence from U.S. Microdata," Working Papers 635, Research Seminar in International Economics, University of Michigan.
  3. Juan Alcacer & Mercedes Delgado, 2012. "Spatial Organization of Firms: Internal and External Agglomeration Economies and Location Choices Through the Value Chain," Working Papers 12-33, Center for Economic Studies, U.S. Census Bureau.
  4. Jonathan Haskel & Robert Z. Lawrence & Edward E. Leamer & Matthew J. Slaughter, 2012. "Globalization and U.S. Wages: Modifying Classic Theory to Explain Recent Facts," Journal of Economic Perspectives, American Economic Association, vol. 26(2), pages 119-40, Spring.
  5. David M. Byrne & Brian K. Kovak & Ryan Michaels, 2013. "Price and quality dispersion in an offshoring market: evidence from semiconductor production services," Finance and Economics Discussion Series 2013-06, Board of Governors of the Federal Reserve System (U.S.).
  6. Fariha Kamal & Brent R. Moulton & Jennifer Ribarsky, 2013. "Measuring “Factoryless” Manufacturing: Evidence From U.S. Surveys," Working Papers 13-44, Center for Economic Studies, U.S. Census Bureau.

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