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The Role of Technological Complexity and Absorptive Capacity in Internalization Decision

  • Arti

    (Delhi School of Economics)

Technology transfer costs have a profound influence on the firm’s entry mode into a production sharing relationship. To explore this nexus, we associate technological complexity of the off-shored input with the organizational mode of international production sharing by extending the Antràs (2005) model. We modify the Antràs model by proposing that the low-tech input, as qualified within the model, cannot be produced in the low wage south without costly technology transfer. The cost of technology transfer in turn depends on three factors, which are the technological complexity of this input, the absorptive capacity of the host country and the wages of the host country. Our model refines the results obtained in Antràs (2005). We find that 1. For high-tech goods, intra-firm transfer is preferred vis-à-vis outsourcing only for intermediate range of technological complexity of the off-shored input, 2. On the other hand, for low-tech goods, where the likelihood of outsourcing is higher in Antràs, intra-firm offshore contract is still possible for low range of technological complexity. Our model has policy suggestions for host countries which aspire to maximize their benefits from the exploding global production phenomenon. As the wage gap between the source and the host country falls, cost considerations for offshoring disappear. New sources of comparative advantage should therefore be created in the host country by subsidizing technology investment and higher education to build higher absorptive capacity.

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Paper provided by Centre for Development Economics, Delhi School of Economics in its series Working papers with number 153.

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Length: 30 pages
Date of creation: May 2007
Date of revision:
Handle: RePEc:cde:cdewps:153
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  1. Paul Bergin & Robert Feenstra, 2006. "Outsourcing and Volatility," Working Papers 628, University of California, Davis, Department of Economics.
  2. Daron Acemoglu & Philippe Aghion & Fabrizio Zilibotti, 2006. "Distance to Frontier, Selection, and Economic Growth," Journal of the European Economic Association, MIT Press, vol. 4(1), pages 37-74, 03.
  3. Oliver Hart & John Moore, 1988. "Property Rights and the Nature of the Firm," Working papers 495, Massachusetts Institute of Technology (MIT), Department of Economics.
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