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Export-Magnification Effect of Offshoring

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  • Jörn Kleinert
  • Nico Zorell

Abstract

We propose a multi-country general equilibrium model with three sectors and heterogeneous firms to analyze the linkages between offshoring and exports. We model a world consisting of many advanced countries that trade differentiated goods among each other and one "workbench country" that specializes on the production of an intermediate good and engages in inter-industry trade with each of the advanced countries. We show analytically that a closer integration of a "workbench country" into the world economy allows more final goods producers to become exporters and raises the export quantities of incumbent exporters ("export-magnification effect"). At the same time, the least productive firms are forced to leave the market. Both effects raise the aggregate efficiency in the differentiated good sector. As a result, real wages and aggregate welfare unequivocally rise in the long run. However, this is associated with large-scale reallocations between sectors and within the differentiated good sector, which may be painful in the presence of frictions.

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File URL: http://www.iaw.edu/RePEc/iaw/pdf/iaw_dp_63.pdf
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Bibliographic Info

Paper provided by Institut für Angewandte Wirtschaftsforschung (IAW) in its series IAW Discussion Papers with number 63.

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Length: 28 pages
Date of creation: Apr 2010
Date of revision:
Handle: RePEc:iaw:iawdip:63

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Keywords: offshoring; multinational firms; distance costs;

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