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A Simple Model of Offshore Outsourcing,Technology Upgrading and Welfare

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Author Info
Jae-won Jung () (THEMA, Université de Cergy-Pontoise.)
Jean Mercenier () (ERMES, Université Panthéon-Assas (Paris 2))

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Abstract

We adapt Yeaple's (2005) heterogeneous agents framework to model firms in the North as making explicit offshore outsourcing decisions to cheap-labor economies. Globalization results from a lowering of the set-up costs incurred when engaging in offshore activities. We highlight how firms'technology transformations due to global- ization will induce skill upgrading in the North, increase aggregate productivity, av- erage wages and therefore total welfare at the cost of increased wage inequalities. We analytically derive mild conditions under which all consumers-including lower-skilled workers-will nevertheless gain from the surge of offshore outsourcing. A parameter- ized version of the model roughly calibrated on U.S. data is then numerically explored and confirms our positive welfare predictions.

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Publisher Info
Paper provided by THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise in its series THEMA Working Papers with number 2008-21.

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Date of creation: 2008
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Handle: RePEc:ema:worpap:2008-21

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Related research
Keywords: Offshore outsourcing; Globalization; Skill upgrading; Technology upgrading; Firm heterogeneity;

Find related papers by JEL classification:
F16 - International Economics - - Trade - - - Trade and Labor Market Interactions

This paper has been announced in the following NEP Reports:

References listed on IDEAS
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  1. Feenstra, R.C. & Hanson, G.H., 1995. "Foreign Investment, Outsourcing and Relative Wages," Department of Economics 95-14, California Davis - Department of Economics.
    Other versions:
  2. Davidson, Carl & Matusz, Steven J. & Shevchenko, Andrei, 2008. "Globalization and firm level adjustment with imperfect labor markets," Journal of International Economics, Elsevier, vol. 75(2), pages 295-309, July. [Downloadable!] (restricted)
  3. Head, Keith & Ries, John, 2002. "Offshore production and skill upgrading by Japanese manufacturing firms," Journal of International Economics, Elsevier, vol. 58(1), pages 81-105, October. [Downloadable!] (restricted)
  4. Alan Deardorf, 2005. "Gains from Trade and Fragmentation," Working Papers 543, Research Seminar in International Economics, University of Michigan. [Downloadable!]
  5. Robert Feenstra & Gordon Hanson, 2001. "Global Production Sharing and Rising Inequality: A Survey of Trade and Wages," NBER Working Papers 8372, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Markusen, James R., 2002. "Multinational Firms and the Theory of International Trade," MPRA Paper 8380, University Library of Munich, Germany. [Downloadable!]
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  7. Gene M. Grossman & Esteban Rossi-Hansberg, 2006. "The rise of offshoring: it's not wine for cloth anymore," Proceedings, Federal Reserve Bank of Kansas City, pages 59-102. [Downloadable!]
  8. Christian Broda & David E. Weinstein, 2006. "Globalization and the Gains from Variety," The Quarterly Journal of Economics, MIT Press, vol. 121(2), pages 541-585, May. [Downloadable!] (restricted)
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  9. Gene M. Grossman & Esteban Rossi-Hansberg, 2006. "Trading Tasks: A Simple Theory of Offshoring," NBER Working Papers 12721, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Conyon, Martin J, et al, 2002. "The Productivity and Wage Effects of Foreign Acquisition in the United Kingdom," Journal of Industrial Economics, Blackwell Publishing, vol. 50(1), pages 85-102, March. [Downloadable!] (restricted)
  11. Choi, E Kwan & Harrigan, James, 2004. "Handbook of International Trade," Staff General Research Papers 11375, Iowa State University, Department of Economics.
  12. Krugman, Paul R, 1981. "Intraindustry Specialization and the Gains from Trade," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 959-73, October. [Downloadable!] (restricted)
  13. Gregory Mankiw, N. & Swagel, Phillip, 2006. "The politics and economics of offshore outsourcing," Journal of Monetary Economics, Elsevier, vol. 53(5), pages 1027-1056, July. [Downloadable!] (restricted)
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  14. Robert C. Feenstra, 2007. "Globalization and Its Impact on Labour," Working Papers 44, The Vienna Institute for International Economic Studies, wiiw. [Downloadable!]
  15. Barba Navaretti, Giorgio & Castellani, Davide & Disdier, Anne-Célia, 2006. "How Does Investing in Cheap Labour Countries Affect Performance at Home? France and Italy," CEPR Discussion Papers 5765, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  16. Elhanan Helpman & Marc J. Melitz & Stephen R. Yeaple, 2004. "Export Versus FDI with Heterogeneous Firms," American Economic Review, American Economic Association, vol. 94(1), pages 300-316, March. [Downloadable!]
  17. Deardorff, Alan V., 2006. "Comment on Mankiw and Swagel, "The politics and economics of offshore outsourcing"," Journal of Monetary Economics, Elsevier, vol. 53(5), pages 1057-1061, July. [Downloadable!] (restricted)
  18. Helpman, Elhanan, 1984. "A Simple Theory of International Trade with Multinational Corporations," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 451-71, June. [Downloadable!] (restricted)
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