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A Simple Model of Offshore Outsourcing,Technology Upgrading and Welfare

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  • Jae-won Jung

    ()
    (THEMA, Université de Cergy-Pontoise.)

  • Jean Mercenier

    ()
    (ERMES, Université Panthéon-Assas (Paris 2))

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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Bibliographic 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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Keywords: Offshore outsourcing; Globalization; Skill upgrading; Technology upgrading; Firm heterogeneity;

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References

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  1. Markusen, James R., 2002. "Multinational Firms and the Theory of International Trade," MPRA Paper 8380, University Library of Munich, Germany.
  2. Mark E. Doms & J . Bradford Jensen, 1998. "Comparing Wages, Skills, and Productivity between Domestically and Foreign-Owned Manufacturing Establishments in the United States," NBER Chapters, in: Geography and Ownership as Bases for Economic Accounting, pages 235-258 National Bureau of Economic Research, Inc.
  3. Christian Broda & David Weinstein, 2004. "Globalization and the gains from variety," Staff Reports 180, Federal Reserve Bank of New York.
  4. Becker, Sascha & Ekholm, Karolina & Muendler, Marc-Andreas, 2012. "Offshoring and the Onshore Composition of Tasks and Skills," CAGE Online Working Paper Series 97, Competitive Advantage in the Global Economy (CAGE).
  5. Yeaple, Stephen & Helpman, Elhanan & Melitz, Marc, 2004. "Export versus FDI with Heterogeneous Firms," Scholarly Articles 3229098, Harvard University Department of Economics.
  6. 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.
  7. Conyon, Martin J, et al, 2002. "The Productivity and Wage Effects of Foreign Acquisition in the United Kingdom," Journal of Industrial Economics, Wiley Blackwell, vol. 50(1), pages 85-102, March.
  8. 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.
  9. Gene M. Grossman & Esteban Rossi-Hansberg, 2008. "Trading Tasks: A Simple Theory of Offshoring," American Economic Review, American Economic Association, vol. 98(5), pages 1978-97, December.
  10. Robert C. Feenstra, 2007. "Globalization and Its Impact on Labour," wiiw Working Papers 44, The Vienna Institute for International Economic Studies, wiiw.
  11. 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.
  12. Feenstra, R.C. & Hanson, G.H., 1995. "Foreign Investment, Outsourcing and Relative Wages," Papers 95-14, California Davis - Institute of Governmental Affairs.
  13. Gene M. Grossman & Esteban Rossi-Hansberg, 2006. "The rise of offshoring: it's not wine for cloth anymore," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 59-102.
  14. 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.
  15. Alan Deardorf, 2005. "Gains from Trade and Fragmentation," Working Papers 543, Research Seminar in International Economics, University of Michigan.
  16. N. Gregory Mankiw & Phillip Swagel, 2006. "The Politics and Economics of Offshore Outsourcing," NBER Working Papers 12398, National Bureau of Economic Research, Inc.
  17. 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.
  18. 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.
  19. 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.
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Citations

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Cited by:
  1. Jaewon Jung & Jean Mercenier, 2010. "Routinization-Biased Technical Change, Globalization and Labor Market Polarization: Does Theory Fit the Facts?," Working Papers halshs-00856105, HAL.
  2. Philipp Harms & Jaewon Jung & Oliver Lorz, 2014. "Offshoring and Sequential Production Chains: A General-Equilibrium Analysis," MAGKS Papers on Economics 201402, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  3. Emily Blanchard & Gerald Willmann, 2013. "Trade, Education, and The Shrinking Middle Class," Kiel Working Papers 1831, Kiel Institute for the World Economy.

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