We analyze a model that focuses on the export/outsource decision. Outsourcing has the advantage of providing better information about local preferences. The disadvantage is that producing in the host country also means using the inferior technology embodied in the local capital. The decision of whether to offer an outsourcing contract weighs these two effects against each other. The host country accepts the outsourcing contract if the higher price they pay for the outsourced good is worth the benefit of consuming a manufactured good closer to their ideal variety. These results suggest that as low income countries develop they become a more attractive destination for outsourcing because the quality of their capital improves and the local market is more lucrative. In addition, the developing low income country finds the outsourcing contract more attractive since their increased demand for the correct variety of the manufactured good increases. This suggests that preference based outsourcing is more likely to occur with higher income host countries.
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Paper provided by CESifo GmbH in its series CESifo Working Paper Series with number
CESifo Working Paper No. 2222.
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Reinganum, Jennifer F., .
"Dynamic Games of Innovation,"
Working Papers
287, California Institute of Technology, Division of the Humanities and Social Sciences.
[Downloadable!]
Horowitz, Andrew W & Lai, Edwin L-C, 1996.
"Patent Length and the Rate of Innovation,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(4), pages 785-801, November.