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Ownership and Control in Outsourcing to China: Estimating the Property-Rights Theory of the Firm

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Author Info
Robert C. Feenstra
Gordon H. Hanson

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Abstract

In this paper, we develop a simple model of international outsourcing and apply it to processing trade in China. We observe China's processing exports broken down by who owns the plant and by who controls the inputs the plant processes. Multinational firms engaged in export processing in China tend to split factory ownership and input control with managers in China: the most common outcome is to have foreign factory ownership but Chinese control over input purchases. To account for this organizational arrangement, we appeal to a property-rights model of the firm. Multinational firms and the Chinese factory managers with whom they contract divide the surplus associated with export processing by Nash bargaining. Investments in input search, production, and marketing are partially relationship specific. In our benchmarks estimates, this relationship specificity is lowest in southern coastal provinces, where export markets are thickest, and highest in interior and northern provinces. The probability contracts are enforced has a similar pattern and is the lowest along the southern coast and the highest in the north.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10198.

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Date of creation: Jan 2004
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Handle: RePEc:nbr:nberwo:10198

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Find related papers by JEL classification:
F14 - International Economics - - Trade - - - Country and Industry Studies of Trade
L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Eiichi Tomiura, 2004. "Foreign outsourcing and firm-level characteristics: evidence from Japanese manufacturers," Hi-Stat Discussion Paper Series d04-64, Institute of Economic Research, Hitotsubashi University. [Downloadable!]
  2. Nishaal Gooroochurn & Aoife Hanley, 2006. "A Tale of Two Literatures: Transaction Cost and Property Rights in Innovation Outsourcing," Occasional Papers 17, Industrial Economics Division. [Downloadable!]
    Other versions:
  3. Gilad Aharonovitz, 2006. "Migration of Firms, Home Bias and the Geographical Distribution of Growth," DEGIT Conference Papers c011_038, DEGIT, Dynamics, Economic Growth, and International Trade. [Downloadable!]
  4. Marcella Nicolini, 2007. "Institutions and Offshoring Decision," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
  5. Deborah L. Swenson, 2007. "Multinationals and the Creation of Chinese Trade Linkages," NBER Working Papers 13271, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Naghavi, Alireza & Ottaviano, Gianmarco I P, 2006. "Outsourcing, Contracts and Innovation Networks," CEPR Discussion Papers 5681, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  7. Devashish Mitra & Priya Ranjan, 2007. "Temporary Shocks and Offshoring: The Role of External Economies and Firm Heterogeneity," IZA Discussion Papers 2811, Institute for the Study of Labor (IZA). [Downloadable!]
  8. Valeria Gattai & Corrado Molteni, 2007. "Dissipation of Knowledge and the Boundaries of the Multinational Enterprise," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 127(1), pages 1-26, April. [Downloadable!] (restricted)
  9. Alla Lileeva & Johannes Van Biesebroeck, 2007. "Outsourcing when Investments are Specific and Complementary," Working Papers tecipa-287, University of Toronto, Department of Economics. [Downloadable!]
  10. Devashish Mitra & Priya Ranjan, 2007. "Offshoring and Unemployment," IZA Discussion Papers 2805, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  11. Naghavi, Alireza & Ottaviano, Gianmarco I P, 2006. "Outsourcing, Complementary Innovations and Growth," CEPR Discussion Papers 5925, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  12. Pol Antràs & Mihir A. Desai & C. Fritz Foley, 2007. "Multinational Firms, FDI Flows and Imperfect Capital Markets," NBER Working Papers 12855, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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