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Financial Imperfection and Outsourcing Decision

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  • Noriyuki Yanagawa

    (Faculty of Economics, University of Tokyo)

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    Abstract

    The relation between productivity level and the mode of organi zation remains on unsolved puzzle in international trade theory. As pointed out by Antras and Helpman (2004), while some studies indicate that low productivity firms choose to outsource, other studies have derived results to the contrary. This paper attempts to solve the puzzle by taking into account the imperfections of financial markets. If the enforcement level of the financial market in the South country is low, only low productivity firms choose outsourcing in the South. On the other hand, if the enforcement level is sufficiently high in the South country, high productivity firms choose outsourcing in the South and low productivity firms choose integration in the North country. Thus, we demonstrate that the difference in the empirical results of previous studies arises from the different degrees of financial imperfections in the host country. Furtheremore, we extend this model to a multi-country model.

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    File URL: http://www.cirje.e.u-tokyo.ac.jp/research/dp/2008/2008cf586.pdf
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    Bibliographic Info

    Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-586.

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    Length: 31pages
    Date of creation: Sep 2008
    Date of revision:
    Handle: RePEc:tky:fseres:2008cf586

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    1. Chu-Chia S. Lin & Ivan Png, 2003. "Monitoring costs and the mode of international investment," Journal of Economic Geography, Oxford University Press, vol. 3(3), pages 261-274, July.
    2. Aw, Bee Yan & Lee, Yi, 2008. "Firm heterogeneity and location choice of Taiwanese multinationals," Journal of International Economics, Elsevier, vol. 76(2), pages 403-415, December.
    3. 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.
    4. Elhanan Helpman, 2006. "Trade, FDI, and the Organization of Firms," Journal of Economic Literature, American Economic Association, vol. 44(3), pages 589-630, September.
    5. Aw, Bee Yan & Lee, Yi, 2008. "Firm heterogeneity and location choice of Taiwanese multinationals," Journal of International Economics, Elsevier, vol. 75(1), pages 167-179, May.
    6. Pol Antràs & Ricardo J. Caballero, 2009. "Trade and Capital Flows: A Financial Frictions Perspective," Journal of Political Economy, University of Chicago Press, vol. 117(4), pages 701-744, 08.
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