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Vertical FDI versus outsourcing: The role of host country human capital

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  • Arti Grover Goswami

Abstract

The existing literature on offshoring neglects the importance of host country conditions in affecting the boundaries of a firm. In this paper, we focus on the role of the host country's human capital in affecting the organization of offshore production. Acknowledging that an input is produced offshore only after training the host labor, we propose that this training cost depends on the human capital gap between the home and the host country. Our model finds that a sourcing firm prefers to offshore production internationally only if the human capital gap between the home and the host country is below a threshold. Secondly, as the human capital gap increases, the probability for international outsourcing vis-à-vis intra-firm trade increases. Finally, as opposed to conventional wisdom, our model shows the possibility of outsourcing inputs of a high-tech good when the human capital gap between the home and the host is high.

Suggested Citation

  • Arti Grover Goswami, 2012. "Vertical FDI versus outsourcing: The role of host country human capital," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 21(4), pages 471-492, May.
  • Handle: RePEc:taf:jitecd:v:21:y:2012:i:4:p:471-492
    DOI: 10.1080/09638199.2010.497848
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    File URL: http://hdl.handle.net/10.1080/09638199.2010.497848
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    References listed on IDEAS

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    1. Bartel, Ann P & Lach, Saul & Sicherman, Nachum, 2005. "Outsourcing and Technological Change," CEPR Discussion Papers 5082, C.E.P.R. Discussion Papers.
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    Cited by:

    1. Goswami, Arti Grover, 2013. "Vertical FDI versus outsourcing: The role of technology transfer costs," The North American Journal of Economics and Finance, Elsevier, vol. 25(C), pages 1-21.

    More about this item

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Comparison of Public and Private Enterprise and Nonprofit Institutions; Privatization; Contracting Out

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