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The export-magnification effect of offshoring

Author

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  • Joern Kleinert

    ( Karl-Franzens University of Graz)

  • Nico Zorell

    (European Central Bank, Frankfurt am Main)

Abstract

In this paper we propose a novel mechanism that helps explain the surge in world trade over the last two decades: the export-magnification effect of offshoring. We show analytically in a general equilibrium model with heterogeneous firms that a fall in variable offshoring costs boosts trade in differentiated final goods through an intra-industry reallocation of resources towards the more productive firms. More specifically, lower barriers to offshoring reduce the average costs of inputs for offshoring firms and allow more firms to source cheap foreign intermediates, which improves firm-level price competitiveness. This, in turn, translates into higher export quantities of incumbent exporters (intensive margin) and the entry of new exporters (extensive margin). The increase in final goods trade comes on top of the boost to trade in intermediates. Hence the mechanism proposed in this paper is consistent with the fact that the share of intermediate goods in international trade has remained broadly stable.

Suggested Citation

  • Joern Kleinert & Nico Zorell, 2012. "The export-magnification effect of offshoring," Graz Economics Papers 2012-09, University of Graz, Department of Economics.
  • Handle: RePEc:grz:wpaper:2012-09
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    More about this item

    Keywords

    offshoring; international trade; multinational firms;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F15 - International Economics - - Trade - - - Economic Integration
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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