Why do firms decide to offshore certain parts of their production process? What qualifies certain countries as particularly attractive locations to offshore? In this paper we address these questions with a theory of international production hierarchies in which organizations arise endogenously to make efficient use of agents' knowledge. Our theory highlights the role of host-country management skills (middle management) in bringing about the emergence of international offshoring. By shielding top management in the source country from routine problems faced by host country workers, the presence of middle managers improves the efficiency of the transmission of knowledge across countries. The model further delivers the prediction that the positive effect of middle skills on offshoring is weaker, the more advanced are communication technologies in the host country. We provide evidence consistent with this prediction.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
12196.
Length: Date of creation: May 2006 Date of revision: Handle: RePEc:nbr:nberwo:12196
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Find related papers by JEL classification: D2 - Microeconomics - - Production and Organizations F1 - International Economics - - Trade F2 - International Economics - - International Factor Movements and International Business J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
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