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A Simple Model of Offshore Outsourcing, Technology Upgrading and Welfare

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  • Jaewon Jung

    (THEMA - Théorie économique, modélisation et applications - CNRS : UMR8184 - Université de Cergy Pontoise)

  • Jean Mercenier

    (ERMES - Equipe de recherche sur les marches, l'emploi et la simulation - CNRS : UMR7017 - Université Paris II - Panthéon-Assas)

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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 globalization will induce skill upgrading in the North, increase aggregate productivity, average 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 parameterized version of the model roughly calibrated on U.S. data is then numerically explored and confirms our positive welfare predictions.

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    File URL: http://halshs.archives-ouvertes.fr/docs/00/96/73/69/PDF/WP5-GmonD-OffshoreOuts-jun09.pdf
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    Bibliographic Info

    Paper provided by HAL in its series Working Papers with number halshs-00967369.

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    Date of creation: 28 Mar 2014
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    Handle: RePEc:hal:wpaper:halshs-00967369

    Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00967369
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    Related research

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

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    1. James R. Markusen, 2004. "Multinational Firms and the Theory of International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262633078, December.
    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.
    3. 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.
    4. 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.
    5. 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.
    6. David Weinstein & Christian Broda, 2004. "Globalization and the Gains from Variety," 2004 Meeting Papers 530, Society for Economic Dynamics.
    7. Helpman, Elhanan, 1984. "A Simple Theory of International Trade with Multinational Corporations," Scholarly Articles 3445092, Harvard University Department of Economics.
    8. 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.
    9. 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.
    10. 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.
    11. Alan Deardorf, 2005. "Gains from Trade and Fragmentation," Working Papers 543, Research Seminar in International Economics, University of Michigan.
    12. Yeaple, Stephen Ross, 2005. "A simple model of firm heterogeneity, international trade, and wages," Journal of International Economics, Elsevier, vol. 65(1), pages 1-20, January.
    13. 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.
    14. Pär Hansson, 2005. "Skill Upgrading and Production Transfer within Swedish Multinationals," Scandinavian Journal of Economics, Wiley Blackwell, vol. 107(4), pages 673-692, December.
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