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A Model of Outsourcing and Foreign Direct Investment

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  • Frank Stähler

Abstract

This paper presents a model in which two firms may use foreign direct investment or outsourcing in order to reduce the production cost of an intermediate input. Outsourcing requires training which is costly and creates a positive spillover. The paper shows that the equilibrium depends on the level of training costs. If they are high, only bilateral outsourcing is possible in equilibrium. If bilateral outsourcing is incomplete, it will not change prices compared to no outsourcing. If they are low, only complete outsourcing is possible. If complete outsourcing is unilateral (bilateral), the price increases (decreases) with the degree of spillovers.

Suggested Citation

  • Frank Stähler, 2007. "A Model of Outsourcing and Foreign Direct Investment," Review of Development Economics, Wiley Blackwell, vol. 11(2), pages 321-332, May.
    • Handle: RePEc:bla:rdevec:v:11:y:2007:i:2:p:321-332
    DOI: 10.1111/j.1467-9361.2007.00414.x
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    References listed on IDEAS

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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. Gene M. Grossman & Elhanan Helpman, 2005. "Outsourcing in a Global Economy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 72(1), pages 135-159.
    3. repec:pri:wwseco:dp218 is not listed on IDEAS
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    Cited by:

    1. Anwar, Sajid & Sun, Sizhong & Valadkhani, Abbas, 2013. "International outsourcing of skill intensive tasks and wage inequality," Economic Modelling, Elsevier, vol. 31(C), pages 590-597.
    2. Anwar, Sajid, 2013. "Outsourcing and the skilled–unskilled wage gap," Economics Letters, Elsevier, vol. 118(2), pages 347-350.
    3. Arijit Mukherjee & Yingyi Tsai, 2010. "International Outsourcing And Welfare Reduction: An Entry‐Deterrence Story," Manchester School, University of Manchester, vol. 78(6), pages 647-659, December.

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