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Offshore production and business cycle dynamics with heterogeneous firms

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  • Zlate, Andrei

Abstract

To examine the effect of offshoring through vertical FDI on the international transmission of business cycles, I propose a two-country model in which firms endogenously choose the location of their production plants over the business cycle. Firms face a sunk cost to enter the domestic market and an additional fixed cost to produce offshore. As such, the offshoring decision depends on the firm-specific productivity and on fluctuations in the relative cost of effective labor. The model generates a procyclical pattern of offshoring and dynamics along its extensive margin that are consistent with data from Mexico's maquiladora sector. The extensive margin enhances the procyclical response of the value added offshore to expansions in the home economy, as the number of offshoring firms mirrors the dynamics of firm entry at home. As a result, offshoring increases the comovement of output across economies, in line with the empirical evidence.

Suggested Citation

  • Zlate, Andrei, 2016. "Offshore production and business cycle dynamics with heterogeneous firms," Journal of International Economics, Elsevier, vol. 100(C), pages 34-49.
  • Handle: RePEc:eee:inecon:v:100:y:2016:i:c:p:34-49
    DOI: 10.1016/j.jinteco.2016.01.004
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    Cited by:

    1. Andrei Zlate & Federico Mandelman, 2013. "Offshoring, Low-skilled Immigration and Labor Market Polarization," 2013 Meeting Papers 1073, Society for Economic Dynamics.
    2. Jörn Kleinert & Julien Martin & Farid Toubal, 2015. "The Few Leading the Many: Foreign Affiliates and Business Cycle Comovement," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(4), pages 134-159, October.
    3. Contessi, Silvio, 2015. "Multinational firms׳ entry and productivity: Some aggregate implications of firm-level heterogeneity," Journal of Economic Dynamics and Control, Elsevier, vol. 61(C), pages 61-80.
    4. Mandelman, Federico S., 2016. "Labor market polarization and international macroeconomic dynamics," Journal of Monetary Economics, Elsevier, vol. 79(C), pages 1-16.
    5. Kurz, Christopher & Senses, Mine Z., 2016. "Importing, exporting, and firm-level employment volatility," Journal of International Economics, Elsevier, vol. 98(C), pages 160-175.
    6. Sauré, Philip, 2017. "Time-intensive R&D and unbalanced trade," European Economic Review, Elsevier, vol. 91(C), pages 229-244.
    7. Auray, Stéphane & Eyquem, Aurélien & Poutineau, Jean-Christophe, 2012. "The effect of a common currency on the volatility of the extensive margin of trade," Journal of International Money and Finance, Elsevier, vol. 31(5), pages 1156-1179.
    8. Pundit,Madhavi, 2013. "Comovement in business cycles and trade in intermediate goods," Working Papers 13/116, National Institute of Public Finance and Policy.
    9. Cacciatore, Matteo, 2014. "International trade and macroeconomic dynamics with labor market frictions," Journal of International Economics, Elsevier, vol. 93(1), pages 17-30.
    10. Javier Cravino & Andrei A. Levchenko, 2017. "Multinational Firms and International Business Cycle Transmission," The Quarterly Journal of Economics, Oxford University Press, vol. 132(2), pages 921-962.
    11. Gu, Grace Weishi, 2015. "A Tale of Two Countries: Sovereign Default, Exchange Rate, and Trade," MPRA Paper 61900, University Library of Munich, Germany.
    12. Wong, Chin-Yoong & Eng, Yoke-Kee, 2013. "International business cycle co-movement and vertical specialization reconsidered in multistage Bayesian DSGE model," International Review of Economics & Finance, Elsevier, vol. 26(C), pages 109-124.
    13. Mine Senses & Andrei Zlate & Christopher Kurz, 2017. "All Shook Up: International Trade and Firm-level Volatility," 2017 Meeting Papers 851, Society for Economic Dynamics.
    14. Roberto Coronado, 2011. "Offshoring and volatility: more evidence from Mexico's maquiladora industry," Working Papers 1106, Federal Reserve Bank of Dallas.

    More about this item

    Keywords

    Offshore production; Extensive margin; Heterogeneous firms; Firm entry; Business cycle dynamics; Terms of labor;

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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