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Financial Imperfection and Outsourcing Decision

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  • Noriyuki Yanagawa

    (Faculty of Economics, University of Tokyo)

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    Abstract

    The relation between productivity level and the mode of organization remains on unsolved puzzle in international trade theory. As pointed out by Antras and Helpman (2004), while some studies indicate that low productivity firms choose to outsource, other studies have derived results to the contrary. This paper attempts to solve the puzzle by taking into account the imperfections of financial markets. If the enforcement level of the financial market in the South country is low, only low productivity firms choose outsourcing in the South. On the other hand, if the enforcement level is sufficicently high in the South country, high productivity firms choose outsourcing in the South and low productivity firms choose integration in the North country. Thus, we demonstrate that the difference in the empirical results of previous studies arises from the different degrees of financial imperfections in the host country. Furtheremore, we extend this model to a multi-country model.

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    File URL: http://www.carf.e.u-tokyo.ac.jp/pdf/workingpaper/fseries/139.pdf
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    Bibliographic Info

    Paper provided by Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo in its series CARF F-Series with number CARF-F-134.

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    Length: 31 pages
    Date of creation: Sep 2008
    Date of revision:
    Handle: RePEc:cfi:fseres:cf134

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    1. Pol Antràs & Mihir A. Desai & C. Fritz Foley, 2009. "Multinational Firms, FDI Flows, and Imperfect Capital Markets," The Quarterly Journal of Economics, MIT Press, vol. 124(3), pages 1171-1219, August.
    2. Chu-Chia S. Lin & Ivan Png, 2002. "Monitoring Costs and the Mode of International Investment," International Trade 0210004, EconWPA.
    3. Marin, Dalia, 2005. "A New International Division of Labor in Europe: Outsourcing and Offshoring to Eastern Europe," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 80, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    4. Elhanan Helpman, 2006. "Trade, FDI, and the Organization of Firms," Harvard Institute of Economic Research Working Papers 2118, Harvard - Institute of Economic Research.
    5. Kiminori Matsuyama, 2004. "Credit Market Imperfections and Patterns of International Trade and Capital Flows," CIRJE F-Series CIRJE-F-293, CIRJE, Faculty of Economics, University of Tokyo.
    6. Pol Antràs & Ricardo J. Caballero, 2007. "Trade and Capital Flows: A Financial Frictions Perspective," NBER Working Papers 13241, 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. Aw, Bee Yan & Lee, Yi, 2008. "Firm heterogeneity and location choice of Taiwanese multinationals," Journal of International Economics, Elsevier, vol. 75(1), pages 167-179, May.
    9. Aw, Bee Yan & Lee, Yi, 2008. "Firm heterogeneity and location choice of Taiwanese multinationals," Journal of International Economics, Elsevier, vol. 76(2), pages 403-415, December.
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