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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Paper provided by KITeS, Centre for Knowledge, Internationalization and Technology Studies, Universita' Bocconi, Milano, Italy in its series KITeS Working Papers with number
155.
Length: 25 pages Date of creation: Apr 2004 Date of revision:
Apr 2004 Handle: RePEc:cri:cespri:wp155
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Find related papers by JEL classification: F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
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.:
Grossman, G.M. & Helpman, E., 2002.
"Outsourcing in a Global Economy,"
Papers
218, Princeton, Woodrow Wilson School - Public and International Affairs.
Other versions:
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..
[Downloadable!]
Gene M. Grossman & Elhanan Helpman, 2002.
"Outsourcing versus FDI in Industry Equilibrium,"
Working Papers
148, Princeton University, Woodrow Wilson School of Public and International Affairs, Discussion Papers in Economics..
[Downloadable!]
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