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The Role of Public Infrastructure for Firm Location and International Outsourcing

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  • Hartmut Egger
  • Josef Falkinger

Abstract

This paper presents a model in which final goods producers outsource intermediate input production. Intermediate inputs are differentiated and their production can be located at home or abroad. The model is used to examine competitive location policy in a (two-country) free trade agreement (FTA). It is shown that national public infrastructure investment has a positive effect on both the number of intermediate input producers and the return to the immobile factor in the home country. International outsourcing from home declines. Opposite effects are triggered in the partner country. In a welfare analysis we characterize national infrastructure policies that aim to maximize national income (net of tax costs) and compare the non-cooperative FTA-equilibrium with optimal policies from an integrated point of view. It is shown when coordination of competitive location policies is useful and when it is not.

Suggested Citation

  • Hartmut Egger & Josef Falkinger, 2003. "The Role of Public Infrastructure for Firm Location and International Outsourcing," CESifo Working Paper Series 970, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_970
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    File URL: http://www.cesifo-group.de/DocDL/cesifo_wp970.pdf
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    References listed on IDEAS

    as
    1. Egger, Hartmut & Falkinger, Josef, 2003. "The distributional effects of international outsourcing in a 2 x 2 production model," The North American Journal of Economics and Finance, Elsevier, vol. 14(2), pages 189-206, August.
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    3. Gene M. Grossman & Elhanan Helpman, 2003. "Outsourcing Versus FDI in Industry Equilibrium," Journal of the European Economic Association, MIT Press, vol. 1(2-3), pages 317-327, 04/05.
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    11. repec:hhs:iuiwop:430 is not listed on IDEAS
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    13. Feenstra, R.C. & Hanson, G.H., 1995. "Foreign Investment, Outsourcing and Relative Wages," Papers 95-14, California Davis - Institute of Governmental Affairs.
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    20. Egger, Hartmut, 2002. "International Outsourcing in a Two-Sector Heckscher-Ohlin Model," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 17, pages 687-709.
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    Keywords

    international outsourcing; firm location; public infrastructure; welfare effects;

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