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Firm Heterogeneity, Contract Enforcement, and the Industry Dynamics of Offshoring

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  • Gianmarco I.P. Ottaviano

    (Bocconi University, FEEM and CEPR)

  • Alireza Naghavi

    (Università di Bologna)

Abstract

We develop an endogenous growth model to study the long run consequences of offshoring with firm heterogeneity and incomplete contracts. In so doing, we model offshoring as the geographical fragmentation of a firm’s production chain between a home upstream division and a foreign downstream one. On the positive side, we show that, when contracts are incomplete, the possibility of offshoring has favorable implications for economic growth. Yet, offshoring induced by a higher bargaining power of the upstream division can hamper growth: while there is always a positive correlation between upstream bargaining weight and offshoring activities, there is a non-monotonic relationship between these and growth. Whether offshoring with incomplete contracts also increases consumption depends on firm heterogeneity. On the normative side, we show that, whereas with complete contract efficiency is restored through a subsidy to R&D only, with incomplete contracts a production subsidy to offshored upstream divisions is needed too.

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Bibliographic Info

Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2009.54.

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Date of creation: Jul 2009
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Handle: RePEc:fem:femwpa:2009.54

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Keywords: Offshoring; Heterogeneous Firms; Incomplete Contracts; Growth; Industry Dynamics;

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References

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  1. Richard E. Baldwin & Frédéric Robert-Nicoud, 2007. "Offshoring: general equilibrium effects on wages, production and trade," LSE Research Online Documents on Economics 19720, London School of Economics and Political Science, LSE Library.
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  9. Antras, Pol, 2003. "Firms, Contracts, and Trade Structure," Scholarly Articles 3196328, Harvard University Department of Economics.
  10. Richard E. Baldwin & Frédéric Robert-Nicoud, 2006. "Trade and Growth with Heterogenous Firms," NBER Working Papers 12326, National Bureau of Economic Research, Inc.
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  14. 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.
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  17. Alexander Hijzen & Tomohiko Inui & Yasuyuki Todo, 2010. "Does Offshoring Pay? Firm-Level Evidence From Japan," Economic Inquiry, Western Economic Association International, vol. 48(4), pages 880-895, October.
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  19. Naghavi, Alireza & Ottaviano, Gianmarco Ireo Paolo, 2006. "Outsourcing, Contracts and Innovation Networks," CEPR Discussion Papers 5681, C.E.P.R. Discussion Papers.
  20. Wilhelm Kohler, 2004. "International outsourcing and factor prices with multistage production," Economic Journal, Royal Economic Society, vol. 114(494), pages C166-C185, 03.
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Cited by:
  1. Van Assche, Ari & Schwartz, Galina A., 2010. "Input specificity and global sourcing," Journal of the Japanese and International Economies, Elsevier, vol. 24(1), pages 69-85, March.
  2. Andreas Hoefele, 2013. "The Skill Content of Offshoring and Growth," Discussion Paper Series 2013_12, Department of Economics, Loughborough University, revised Oct 2013.

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