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

  • Gianmarco I.P. Ottaviano

    (Bocconi University, FEEM and CEPR)

  • Alireza Naghavi

    (Università di Bologna)

We 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.

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Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2009.54.

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Date of creation: Jul 2009
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Handle: RePEc:fem:femwpa:2009.54
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  1. Elhanan Helpman, 2006. "Trade, FDI, and the Organization of Firms," Journal of Economic Literature, American Economic Association, vol. 44(3), pages 589-630, September.
  2. Richard E. Baldwin & Frédéric Robert-Nicoud, 2007. "Offshoring: General Equilibrium Effects on Wages, Production and Trade," CEP Discussion Papers dp0794, Centre for Economic Performance, LSE.
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  10. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-58, December.
  11. Alexander Hijzen & Tomohiko Inui & Yasuyuki Todo, 2010. "Does Offshoring Pay? Firm-Level Evidence From Japan," Economic Inquiry, Western Economic Association International, vol. 48(4), pages 880-895, October.
  12. Gene M. Grossman & Elhanan Helpman, 2002. "Managerial Incentives and the International Organization of Production," Working Papers 147, Princeton University, Woodrow Wilson School of Public and International Affairs, Discussion Papers in Economics..
  13. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
  14. Alireza Naghavi & Gianmarco Ottaviano, 2009. "Offshoring and product innovation," Economic Theory, Springer, vol. 38(3), pages 517-532, March.
  15. Choi, E. Kwan & Harrigan, James, 2003. "Handbook of International Trade," Staff General Research Papers 11375, Iowa State University, Department of Economics.
  16. Gene M. Grossman & Esteban Rossi-Hansberg, 2008. "Trading Tasks: A Simple Theory of Offshoring," American Economic Review, American Economic Association, vol. 98(5), pages 1978-97, December.
  17. Robert Feenstra & Gordon Hanson, 2001. "Global Production Sharing and Rising Inequality: A Survey of Trade and Wages," NBER Working Papers 8372, National Bureau of Economic Research, Inc.
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  19. repec:hrv:faseco:4784029 is not listed on IDEAS
  20. Wilhelm Kohler, 2004. "International outsourcing and factor prices with multistage production," Economic Journal, Royal Economic Society, vol. 114(494), pages C166-C185, 03.
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