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FDI, International Outsourcing and Linkages

Author

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  • Carlo Altomonte

    (Università Bocconi,)

  • Chiara Bonassi

    (ISLA-Università Bocconi)

Abstract

We investigate the trade-off between FDI and international outsourcing of interme-diate inputs by a producer of a final good. To this extent, we characterize an industry equilibrium where fixed sunk costs exist for the setting up of foreign subsidiaries and the latter are heterogeneous in productivity levels. We relate the resulting trade-off between outsourcing and FDI to the degree of contract completeness prevailing in the host country and explore its implications in terms of linkages existing between final producers and local suppliers. We find that an increase in competition levels has a non-monotonic effect on the profit of the local suppliers. Therefore, the host country has an incentive to contrast the entry of new final producers with a reduction in the degree of contract completeness.

Suggested Citation

  • Carlo Altomonte & Chiara Bonassi, 2004. "FDI, International Outsourcing and Linkages," KITeS Working Papers 155, KITeS, Centre for Knowledge, Internationalization and Technology Studies, Universita' Bocconi, Milano, Italy, revised Apr 2004.
  • Handle: RePEc:cri:cespri:wp155
    as

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    File URL: ftp://ftp.unibocconi.it/pub/RePEc/cri/papers/WP155Altomonte.pdf
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    References listed on IDEAS

    as
    1. 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.
    2. Gene M. Grossman & Elhanan Helpman, 2005. "Outsourcing in a Global Economy," Review of Economic Studies, Oxford University Press, vol. 72(1), pages 135-159.
    3. Robert C. Feenstra, 1998. "Integration of Trade and Disintegration of Production in the Global Economy," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 31-50, Fall.
    4. Elhanan Helpman & Marc J. Melitz & Stephen R. Yeaple, 2004. "Export Versus FDI with Heterogeneous Firms," American Economic Review, American Economic Association, vol. 94(1), pages 300-316, March.
    5. 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.
    6. Gene M. Grossman & Elhanan Helpman, 2002. "Integration versus Outsourcing in Industry Equilibrium," The Quarterly Journal of Economics, Oxford University Press, vol. 117(1), pages 85-120.
    7. Carlo Altomonte, 2007. "Regional Economic Integration and the Location of Multinational Firms," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 143(2), pages 277-305, July.
    8. Görg, Holger & Greenaway, David, 2002. "Much Ado About Nothing? Do Domestic Firms Really Benefit from Foreign Investment?," CEPR Discussion Papers 3485, C.E.P.R. Discussion Papers.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    FDI; outsourcing; imperfect contracting; spillovers;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights

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