Vertical FDI versus Outsourcing: A Welfare Comparison from the Perspective of the Host Country
The theory on organization of offshore production is most often viewed through the lens of a source country. Moreover, internalization literature in a vertical production transfer context is divorced from its welfare consequences. That is, the decision to “make or buy” offshore input is usually not connected with the welfare effect of each alternative organizational mode. In this paper we recognize the importance of the mode of organization of fragmented production for the host country. Whether production sharing arrangement is internalized by the parent firm in the form of a vertical foreign direct investment (VFDI) relationship or transacted externally through outsourcing contracts, affects the welfare of the host country in a significant way. Using a Grossman-Helpman quality ladders model and Vernon’s product cycle set up, we compare the welfare derived by the host country in the two alternative regimes of production sharing arrangements in the host country. The ability to maximize welfare in the alternative regimes is found to be contingent on the absorptive capacity of the host country. If the host country's absorptive capacity is above a threshold level, outsourcing is more welfare enhancing vis-à-vis VFDI; while even with an absorptive capacity lower than this threshold, outsourcing being welfare improving over VFDI cannot be ruled out.
|Date of creation:||Nov 2008|
|Date of revision:|
|Contact details of provider:|| Postal: Niels Bohrs Vej 9, 6700 Esbjerg|
Phone: +45 6550 2233
Fax: +45 6550 1090
Web page: http://degit.sam.sdu.dk/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Pol Antras & Elhanan Helpman, 2004.
Journal of Political Economy,
University of Chicago Press, vol. 112(3), pages 552-580, June.
- Pol Antras & Elhanan Helpman, 2003. "Global Sourcing," Harvard Institute of Economic Research Working Papers 2005, Harvard - Institute of Economic Research.
- Antras, Pol & Helpman, Elhanan, 2004. "Global Sourcing," Scholarly Articles 3196327, Harvard University Department of Economics.
- Pol Antràs & Elhanan Helpman, 2003. "Global Sourcing," NBER Working Papers 10082, National Bureau of Economic Research, Inc.
- Antràs, Pol & Helpman, Elhanan, 2004. "Global Sourcing," CEPR Discussion Papers 4170, C.E.P.R. Discussion Papers.
- Saggi, Kamal, 1999. "Foreign Direct Investment, Licensing, and Incentives for Innovation," Review of International Economics, Wiley Blackwell, vol. 7(4), pages 699-714, November.
- Gene M. Grossman & Elhanan Helpman, 2002.
"Outsourcing in a Global Economy,"
NBER Working Papers
8728, National Bureau of Economic Research, Inc.
- 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.
- Gene M. Grossman & Elhanan Helpman, 2002. "Outsourcing in a Global Economy?," Harvard Institute of Economic Research Working Papers 1966, Harvard - Institute of Economic Research.
- Grossman, G.M. & Helpman, E., 2002. "Outsourcing in a Global Economy," Papers 218, Princeton, Woodrow Wilson School - Public and International Affairs.
- Grossman, Gene M. & Helpman, Elhanan, 2005. "Outsourcing in a Global Economy," Scholarly Articles 25586654, Harvard University Department of Economics.
- Grossman, Gene & Helpman, Elhanan, 2002. "Outsourcing in a Global Economy," CEPR Discussion Papers 3165, C.E.P.R. Discussion Papers.
- Jocelyn Glass, Amy & Saggi, Kamal, 2002. "Licensing versus direct investment: implications for economic growth," Journal of International Economics, Elsevier, vol. 56(1), pages 131-153, January.
- Pack, Howard & Saggi, Kamal, 1997. "Inflows of Foreign Technology and Indigenous Technological Development," Review of Development Economics, Wiley Blackwell, vol. 1(1), pages 81-98, February.
- Gianmarco I. P. Ottaviano & Alessandro Turrini, 2007. "Distance and Foreign Direct Investment when Contracts are Incomplete," Journal of the European Economic Association, MIT Press, vol. 5(4), pages 796-822, 06.
- Saggi, Kamal, 1996. "Entry into a Foreign Market: Foreign Direct Investment versus Licensing," Review of International Economics, Wiley Blackwell, vol. 4(1), pages 99-104, February.
- Glass, Amy Jocelyn & Saggi, Kamal, 2001. "Innovation and wage effects of international outsourcing," European Economic Review, Elsevier, vol. 45(1), pages 67-86, January.
- Mary Amiti & Shang-Jin Wei, 2006. "Service Offshoring and Productivity: Evidence from the United States," NBER Working Papers 11926, National Bureau of Economic Research, Inc.
- Glass, Amy Jocelyn & Saggi, Kamal, 1999. "FDI policies under shared factor markets," Journal of International Economics, Elsevier, vol. 49(2), pages 309-332, December.
- repec:hrv:faseco:4784029 is not listed on IDEAS
- Balcao Reis, Ana, 2001. "On the welfare effects of foreign investment," Journal of International Economics, Elsevier, vol. 54(2), pages 411-427, August.
- Gorg, Holger & Hanley, Aoife, 2005. "International outsourcing and productivity: evidence from the Irish electronics industry," The North American Journal of Economics and Finance, Elsevier, vol. 16(2), pages 255-269, August.
- Beaulieu, Eugene & Benarroch, Michael & Gaisford, James, 2004. "Trade barriers and wage inequality in a North-South model with technology-driven intra-industry trade," Journal of Development Economics, Elsevier, vol. 75(1), pages 113-136, October.
When requesting a correction, please mention this item's handle: RePEc:deg:conpap:c013_009. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jan Pedersen)
If references are entirely missing, you can add them using this form.