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FDI, International Outsourcing and Linkages

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Author Info

  • Carlo Altomonte

    (Università Bocconi,)

  • Chiara Bonassi

    (ISLA-Università Bocconi)

Abstract

We investigate the trade-off between FDI and international outsourcing of interme-diate inputs by a producer of a final good. To this extent, we characterize an industry equilibrium where fixed sunk costs exist for the setting up of foreign subsidiaries and the latter are heterogeneous in productivity levels. We relate the resulting trade-off between outsourcing and FDI to the degree of contract completeness prevailing in the host country and explore its implications in terms of linkages existing between final producers and local suppliers. We find that an increase in competition levels has a non-monotonic effect on the profit of the local suppliers. Therefore, the host country has an incentive to contrast the entry of new final producers with a reduction in the degree of contract completeness.

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File URL: ftp://ftp.unibocconi.it/pub/RePEc/cri/papers/WP155Altomonte.pdf
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Bibliographic Info

Paper provided by KITeS, Centre for Knowledge, Internationalization and Technology Studies, Universita' Bocconi, Milano, Italy in its series KITeS Working Papers with number 155.

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Length: 25 pages
Date of creation: Apr 2004
Date of revision: Apr 2004
Handle: RePEc:cri:cespri:wp155

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Related research

Keywords: FDI; outsourcing; imperfect contracting; spillovers;

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References

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  1. Gene M. Grossman & Elhanan Helpman, 2002. "Outsourcing in a Global Economy," Working Papers 149, Princeton University, Woodrow Wilson School of Public and International Affairs, Discussion Papers in Economics..
  2. Gene M. Grossman & Elhanan Helpman, 2002. "Integration Versus Outsourcing In Industry Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 117(1), pages 85-120, February.
  3. Gene M. Grossman & Elhanan Helpman, 2002. "Outsourcing versus FDI in Industry Equilibrium," NBER Working Papers 9300, National Bureau of Economic Research, Inc.
  4. Görg, Holger & Greenaway, David, 2002. "Much Ado About Nothing? Do Domestic Firms Really Benefit from Foreign Investment?," CEPR Discussion Papers 3485, C.E.P.R. Discussion Papers.
  5. Robert C. Feenstra, . "Integration Of Trade And Disintegration Of Production In The Global Economy," Department of Economics 98-06, California Davis - Department of Economics.
  6. Yeaple, Stephen & Helpman, Elhanan & Melitz, Marc, 2004. "Export versus FDI with Heterogeneous Firms," Scholarly Articles 3229098, Harvard University Department of Economics.
  7. Hummels, David & Ishii, Jun & Yi, Kei-Mu, 2001. "The nature and growth of vertical specialization in world trade," Journal of International Economics, Elsevier, vol. 54(1), pages 75-96, June.
  8. Carlo Altomonte, 2007. "Regional Economic Integration and the Location of Multinational Firms," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 143(2), pages 277-305, July.
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