Financial Imperfection and Outsourcing Decision
AbstractThe 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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Bibliographic InfoPaper 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.
Length: 31 pages
Date of creation: Sep 2008
Date of revision:
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