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Offshoring and Product Innovation

Author

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  • Naghavi, Alireza
  • Ottaviano, Gianmarco

Abstract

We propose an endogenous growth model with offshoring to investigate its effects on product innovation and growth in the country of origin. Offshoring is associated with reduced feedback from offshored plants to domestic labs as well as coordination problems between the offshored and domestic divisions of firms. Production and transport cost parameters affect the static decision to relocate plants but not R&D. Hence, offshoring may be chosen by firms when it damages the growth rate of their countries of origin. In particular, if offshoring reduces the feedback from plants to labs, it is likely to bring dynamic losses when the countries of origin are large, especially in sectors in which R&D is cheap and product differentiation is strong. It is also likely to slow growth in sectors in which contractual incompleteness gives a strong bargaining power to offshored divisions in intra-firm transactions.

Suggested Citation

  • Naghavi, Alireza & Ottaviano, Gianmarco, 2006. "Offshoring and Product Innovation," CEPR Discussion Papers 6008, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:6008
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    References listed on IDEAS

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    More about this item

    Keywords

    growth; incomplete contracts; innovation; offshoring;

    JEL classification:

    • 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

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