Outsourcing Versus Foreign Direct Investment: A Welfare Analysis
Foreign direct investment may not necessarily be the most welfare enhancing form of international investment. The host country may avail options like â€“ Joint venture, technology licensing, franchising, outsourcing etc. A host countryâ€™s choice of organizational form should depend on its growth and welfare effects. This paper compares the welfare effects of FDI with that of outsourcing in the host country using Grossman-Helpman quality ladders framework. If the host absorptive capacity is above a threshold level, outsourcing is more welfare enhancing vis-Ã -vis FDI; while even with lower than threshold absorptive capacity, outsourcing being welfare improving over FDI is not ruled out. [Working Paper No. 140]
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