Outsourcing and International Production of a Multinational: A Theoretical Model and Empirical Evidence from Toyota, Thailand

A stylised partial equilibrium model of an MNC is developed. The model incorporates key aspects of outsourcing in a world of falling trade costs. The multinational, with firm-specific capital operates in two countries that differ in factor prices; it produces final goods with firm specific capital but can source multiple intermediate goods internally from each subsidiary (produced with firm-specific capital and labour), or outsource them from domestic or foreign suppliers. There is a potential trade off between scale of final good production and scope of in-house component production. Trade liberalization can affect both country and organization choices of the firm’s component sourcing and final-good production. We also use a previously unused data set on component trade of Toyota in Southeast Asia to conduct an empirical investigation informed by the model insights.