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Trade Liberalization, Outsourcing, and Firm Productivity

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  • Ralph Ossa
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    Abstract

    Empirical evidence suggests that trade liberalization increases firm productivity. This paper offers a novel explanation for this finding. I develop a simple general equilibrium model of trade in which trade liberalization leads to outsourcing as firms focus on their core competencies in response to tougher competition. Since firms are the better at performing tasks the closer they are to their core competencies, this outsourcing increases firm productivity. Moreover, I also investigate the links between various technological parameters and outsourcing. In particular, I analyze how technological progress, changes in fixed costs, and changes in internal governance costs affect firms' integration decisions.

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    File URL: http://cep.lse.ac.uk/pubs/download/dp0814.pdf
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    Bibliographic Info

    Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0814.

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    Date of creation: Jul 2007
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    Handle: RePEc:cep:cepdps:dp0814

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    Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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    Keywords: Trade Liberalization; Outsourcing; Productivity;

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    1. Andrew B. Bernard & Stephen Redding & Peter K. Schott, 2006. "Multi-product firms and trade liberalization," LSE Research Online Documents on Economics 3684, London School of Economics and Political Science, LSE Library.
    2. repec:rus:hseeco:122439 is not listed on IDEAS
    3. Sofronis Clerides & Saul Lach & James Tybout, 1996. "Is "learning-by-exporting" important? Micro-dynamic evidence from Colombia, Mexico and Morocco," Finance and Economics Discussion Series 96-30, Board of Governors of the Federal Reserve System (U.S.).
    4. Daniel Trefler, 2001. "The Long and Short of the Canada-U.S. Free Trade Agreement," NBER Working Papers 8293, National Bureau of Economic Research, Inc.
    5. Petia Topalova, 2004. "Trade Liberalization and Firm Productivity," IMF Working Papers 04/28, International Monetary Fund.
    6. Marc J. Melitz & Gianmarco I.P. Ottaviano, 2005. "Market Size, Trade, and Productivity," NBER Working Papers 11393, National Bureau of Economic Research, Inc.
    7. Mark J. Melitz, 2002. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," NBER Working Papers 8881, National Bureau of Economic Research, Inc.
    8. Andrew B. Bernard & Jonathan Eaton & J. Bradford Jensen & Samuel Kortum, 2003. "Plants and Productivity in International Trade," American Economic Review, American Economic Association, vol. 93(4), pages 1268-1290, September.
    9. Carsten Eckel & J. Peter Neary, 2010. "Multi-Product Firms and Flexible Manufacturing in the Global Economy," Review of Economic Studies, Oxford University Press, vol. 77(1), pages 188-217.
    10. Pavcnik, Nina, 2002. "Trade Liberalization, Exit, and Productivity Improvement: Evidence from Chilean Plants," Review of Economic Studies, Wiley Blackwell, vol. 69(1), pages 245-76, January.
    11. Choi, E. Kwan & Harrigan, James, 2003. "Handbook of International Trade," Staff General Research Papers 11375, Iowa State University, Department of Economics.
    12. Volker Nocke & Stephen Yeaple, 2006. "Globalization and Endogenous Firm Scope," PIER Working Paper Archive 06-015, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    13. John McLaren, 2000. ""Globalization" and Vertical Structure," American Economic Review, American Economic Association, vol. 90(5), pages 1239-1254, December.
    14. Philippe Aghion & Robin Burgess & Stephen Redding & Fabrizio Zilibotti, 2005. "Entry Liberalization and Inequality in Industrial Performance," Journal of the European Economic Association, MIT Press, vol. 3(2-3), pages 291-302, 04/05.
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