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A Simple Model of Offshore Outsourcing,Technology Upgrading and Welfare

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  • JUNG J.
  • MERCENIER J.

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 ERMES, University Paris 2 in its series Working Papers ERMES with number 0808.

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Date of creation: 2008
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Handle: RePEc:erm:papers:0808

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References

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  1. 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.
  2. Sascha O. Becker & Karolina Ekholm & Marc-Andreas Muendler, 2009. "Offshoring and the Onshore Composition of Tasks and Skills," IAW Discussion Papers 55, Institut für Angewandte Wirtschaftsforschung (IAW).
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. Giorgio Barba Navaretti & Davide Castellani & Anne-Célia Disdier, 2006. "How Does Investing in Cheap Labour Countries Affect Performance at Home? France and Italy," Development Working Papers 215, Centro Studi Luca d\'Agliano, University of Milano.
  8. N. Gregory Mankiw & Phillip Swagel, 2006. "The Politics and Economics of Offshore Outsourcing," NBER Working Papers 12398, National Bureau of Economic Research, Inc.
  9. Markusen, James R., 2002. "Multinational Firms and the Theory of International Trade," MPRA Paper 8380, University Library of Munich, Germany.
  10. 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.
  11. 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.
  12. Robert C. Feenstra, 2007. "Globalization and Its Impact on Labour," wiiw Working Papers 44, The Vienna Institute for International Economic Studies, wiiw.
  13. 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.
  14. Feenstra, R.C. & Hanson, G.H., 1995. "Foreign Investment, Outsourcing and Relative Wages," Department of Economics 95-14, California Davis - Department of Economics.
  15. 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.
  16. 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.
  17. 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.
  18. Alan Deardorf, 2005. "Gains from Trade and Fragmentation," Working Papers 543, Research Seminar in International Economics, University of Michigan.
  19. 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.
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Citations

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Cited by:
  1. Jung J. & Mercenier J., 2010. "Routinization-Biased Technical Change, Globalization and Labor Market Polarization: Does Theory Fit the Facts?," Working Papers ERMES 1006, ERMES, University Paris 2.
  2. Emily Blanchard & Gerald Willmann, 2013. "Trade, Education, and the Shrinking Middle Class," CESifo Working Paper Series 4141, CESifo Group Munich.
  3. Philipp Harms & Jaewon Jung & Oliver Lorz, 2014. "Offshoring and Sequential Production Chains: A General-Equilibrium Analysis," Working Papers 14.01, Swiss National Bank, Study Center Gerzensee.

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