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Global Sourcing of a Complex Good

  • Van Biesebroeck, Johannes
  • Zhang, Lijun

We analyze a firm that produces a final good from multiple intermediates that can each be sourced domestically or from a low-wage country. The model explicitly incorporates that sourcing decisions of intermediates are interdependent. Equilibrium predictions depend crucially on a key modeling assumption--the nature of the trade friction that foreign production has to overcome. If production abroad involves a fixed cost, offshoring one intermediate unambiguously facilitates offshoring of other intermediates. However, if production abroad involves incomplete contracts, offshoring one intermediate almost always makes it more difficult to offshore others. We illustrate that the pattern in prices at which successive automotive parts are imported into the U.S. accords better with the predictions of the incomplete contracting model, except for a few countries with the best governance indicators.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8614.

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Date of creation: Oct 2011
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Handle: RePEc:cpr:ceprdp:8614
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  1. Elhanan Helpman, 2006. "Trade, FDI, and the Organization of Firms," Journal of Economic Literature, American Economic Association, vol. 44(3), pages 589-630, September.
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  3. Pol Antras & Elhanan Helpman, 2004. "Global Sourcing," Journal of Political Economy, University of Chicago Press, vol. 112(3), pages 552-580, June.
  4. Gene M. Grossman & Elhanan Helpman, 2002. "Outsourcing in a Global Economy," Working Papers 149, Princeton University, Woodrow Wilson School of Public and International Affairs, Discussion Papers in Economics..
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  9. Johnson, Robert C. & Noguera, Guillermo, 2012. "Accounting for intermediates: Production sharing and trade in value added," Journal of International Economics, Elsevier, vol. 86(2), pages 224-236.
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  11. Verena Nowak & Christian Schwarz & Jens Suedekum, 2012. "On the Organizational Structure of Multinational Firms - Which Sourcing Mode for which Input?," CESifo Working Paper Series 3823, CESifo Group Munich.
  12. Gene M. Grossman & Esteban Rossi-Hansberg, 2006. "Trading Tasks: A Simple Theory of Offshoring," NBER Working Papers 12721, National Bureau of Economic Research, Inc.
  13. Jonathan P. Doh, 2005. "Offshore Outsourcing: Implications for International Business and Strategic Management Theory and Practice," Journal of Management Studies, Wiley Blackwell, vol. 42(3), pages 695-704, 05.
  14. Egger, Hartmut & Kreickemeier, Udo & Wrona, Jens, 2013. "Offshoring domestic jobs," University of Tuebingen Working Papers in Economics and Finance 50, University of Tuebingen, Faculty of Economics and Social Sciences.
  15. Grossman, G.M. & Helpman, E., 1989. "Endogenous Prduct Cycles," Papers 144, Princeton, Woodrow Wilson School - Public and International Affairs.
  16. Sharon Novak & Scott Stern, 2009. "Complementarity Among Vertical Integration Decisions: Evidence from Automobile Product Development," Management Science, INFORMS, vol. 55(2), pages 311-332, February.
  17. Grossman, G.M. & Helpman, E., 1989. "Endogemour Product Cycles," Papers 10-89, Tel Aviv.
  18. Alla Lileeva & Johannes Van Biesebroeck, 2007. "Outsourcing when Investments are Specific and Complementary," Working Papers tecipa-287, University of Toronto, Department of Economics.
  19. Spencer, Barbara J & Qiu, Larry D, 2001. "Keiretsu and Relationship-Specific Investment: A Barrier to Trade?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 871-901, November.
  20. Robert C. Feenstra & Gordon H. Hanson, 2004. "Ownership and Control in Outsourcing to China: Estimating the Property-Rights Theory of the Firm," NBER Working Papers 10198, National Bureau of Economic Research, Inc.
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  23. Hummels, David & Ishii, Jun & Yi, Kei-Mu, 2001. "The nature and growth of vertical specialization in world trade," Journal of International Economics, Elsevier, vol. 54(1), pages 75-96, June.
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  28. repec:hrv:faseco:4784029 is not listed on IDEAS
  29. Krugman, Paul, 1979. "A Model of Innovation, Technology Transfer, and the World Distribution of Income," Journal of Political Economy, University of Chicago Press, vol. 87(2), pages 253-66, April.
  30. Johannes Van Biesebroeck & Lijun ZHANG, 2011. "Global sourcing of a complex good," Center for Economic Studies - Discussion papers ces11.26, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
  31. V.N. Balasubramanyam, 2008. "Foreign Direct Investment," Chapters, in: International Handbook of Development Economics, Volumes 1 & 2, chapter 39 Edward Elgar.
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