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Firm Heterogeneity, Contract Enforcement, and the Industry Dynamics of Offshoring

Author

Listed:
  • Alireza Naghavi

    () (University of Bologna, Bologna, Italy and FEEM, RECent)

  • Gianmarco I.P. Ottaviano

    () (Bocconi University DEP-KITeS, Milan, Italy - and FEEM, CEPR)

Abstract

develop an endogenous growth model to study the long run consequences of offshoring with firm heterogeneity and incomplete contracts. In so doing, we model offshoring as the geographical fragmentation of a firm’s production chain between a home upstream division and a foreign downstream one. On the positive side, we show that, when contracts are incomplete, the possibility of offshoring has favorable implications for economic growth. Yet, offshoring induced by a higher bargaining power of the upstream division can hamper growth: while there is always a positive correlation between upstream bargaining weight and offshoring activities, there is a non-monotonic relationship between these and growth. Whether offshoring with incomplete contracts also increases consumption depends on firm heterogeneity. On the normative side, we show that, whereas with complete contract efficiency is restored through a subsidy to R&D only, with incomplete contracts a production subsidy to offshored upstream divisions is needed too.

Suggested Citation

  • Alireza Naghavi & Gianmarco I.P. Ottaviano, 2009. "Firm Heterogeneity, Contract Enforcement, and the Industry Dynamics of Offshoring," KITeS Working Papers 022, KITeS, Centre for Knowledge, Internationalization and Technology Studies, Universita' Bocconi, Milano, Italy, revised May 2009.
  • Handle: RePEc:cri:cespri:kites22_wp
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    References listed on IDEAS

    as
    1. Baldwin, Richard E. & Robert-Nicoud, Frederic, 2008. "Trade and growth with heterogeneous firms," Journal of International Economics, Elsevier, vol. 74(1), pages 21-34, January.
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    20. repec:hrv:faseco:4784029 is not listed on IDEAS
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    Cited by:

    1. Van Assche, Ari & Schwartz, Galina A., 2010. "Input specificity and global sourcing," Journal of the Japanese and International Economies, Elsevier, vol. 24(1), pages 69-85, March.
    2. Andreas Hoefele, 2013. "The Skill Content of Offshoring and Growth," Discussion Paper Series 2013_12, Department of Economics, Loughborough University, revised Oct 2013.
    3. Colin Davis & Ken-ichi Hashimoto, 2016. "Innovation and Manufacturing Offshoring with Fully Endogenous Productivity Growth," Discussion Papers 1636, Graduate School of Economics, Kobe University.

    More about this item

    Keywords

    offshoring; heterogeneous firms; incomplete contracts; growth; industry dynamics;

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth

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