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

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  • Robert C. Feenstra
  • Gordon H. Hanson

Abstract

We develop a simple model of international outsourcing and apply it to processing trade in China. Export processing involves a foreign firm contracting with a Chinese factory manager to assemble intermediate inputs into a final product. Whether the same or different parties should have ownership of the processing factory and control over input purchases depends on parameters of the model, which we estimate. We find that multinational firms engaged in export processing in China tend to split factory ownership and input control with local managers: the most common outcome is to have foreign factory ownership but Chinese control over input purchases. Consistent with our model, this pattern is especially prevalent in the southern coastal provinces, where export markets are thickest and contracting costs are lowest.

Suggested Citation

  • Robert C. Feenstra & Gordon H. Hanson, 2005. "Ownership and Control in Outsourcing to China: Estimating the Property-Rights Theory of the Firm," The Quarterly Journal of Economics, Oxford University Press, vol. 120(2), pages 729-761.
  • Handle: RePEc:oup:qjecon:v:120:y:2005:i:2:p:729-761.
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    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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