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Outsourcing Versus Foreign Direct Investment: A Welfare Analysis

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  • Arti Grover

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    Abstract

    Foreign direct investment may not necessarily be the most welfare enhancing form of international investment. The host country may avail options like – Joint venture, technology licensing, franchising, outsourcing etc. A host country’s choice of organizational form should depend on its growth and welfare effects. This paper compares the welfare effects of FDI with that of outsourcing in the host country using Grossman-Helpman quality ladders framework. If the host absorptive capacity is above a threshold level, outsourcing is more welfare enhancing vis-à-vis FDI; while even with lower than threshold absorptive capacity, outsourcing being welfare improving over FDI is not ruled out. [Working Paper No. 140]

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    Bibliographic Info

    Paper provided by eSocialSciences in its series Working Papers with number id:3010.

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    Date of creation: Oct 2010
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    Handle: RePEc:ess:wpaper:id:3010

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    Keywords: outsourcing; foreign direct investment; absorptive capacity;

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    13. Balcao Reis, Ana, 2001. "On the welfare effects of foreign investment," Journal of International Economics, Elsevier, vol. 54(2), pages 411-427, August.
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    16. Ronald B. Davies, 2003. "Fragmentation of Headquarter Services and FDI," University of Oregon Economics Department Working Papers 2003-25, University of Oregon Economics Department, revised 01 Sep 2003.
    17. 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.
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