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To Outsource or Not to Outsource Inn North-South Trade

  • Choi, E. Kwan

This paper investigates outsourcing and foreign direct investment (FDI) decisions based on factor price differentials in North-South trade when the production activity is fragmented into two independent processes. It is shown that (a) when the Southern firm does not have the Northern firm-specific technology for a fragmentable process and capital is imperfectly (perfectly) mobile between countries, the Northern firm produces the final product by outsourcing the other fragmentable process from the South through either FDI or outsourcing to a Southern outsourcee); (b) when the Southern firm acquires the Northern firm-specific technology for the fragmentable process and capital is imperfectly (perfectly) mobile, only the Northern firm produces the final product by outsourcing the other process via FDI and drives out the Southern firm from the world market (both the Northern and Southern firms produce the final product); (c) however, in all the cases, outsourcing is unidirectional from the North to the South.

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File URL: http://www2.econ.iastate.edu/papers/p14997-2010-04-01.pdf
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Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers Archive with number 34997.

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Date of creation: 01 Apr 2010
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Publication status: Published in Frontiers in Finance and Economics, April 2010, vol. 7 no. 1, pp. 60-81
Handle: RePEc:isu:genres:34997
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Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070

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Fax: +1 515.294.0221
Web page: http://www.econ.iastate.edu
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  1. Baldwin, Richard E. & Ottaviano, Gianmarco I. P., 2001. "Multiproduct multinationals and reciprocal FDI dumping," Journal of International Economics, Elsevier, vol. 54(2), pages 429-448, August.
  2. Choi, E. Kwan, 2007. "To outsource or not to outsource in an integrated world," International Review of Economics & Finance, Elsevier, vol. 16(4), pages 521-527.
  3. Elhanan Helpman & Marc J. Melitz & Stephen R. Yeaple, 2004. "Export Versus FDI with Heterogeneous Firms," American Economic Review, American Economic Association, vol. 94(1), pages 300-316, March.
  4. Chi-Chur Chao & Eden S. H. Yu, 1993. "Content Protection, Urban Unemployment and Welfare," Canadian Journal of Economics, Canadian Economics Association, vol. 26(2), pages 481-92, May.
  5. Jagdish Bhagwati & Arvind Panagariya & T. N. Srinivasan, 2004. "The Muddles over Outsourcing," International Trade 0408004, EconWPA.
  6. Elhanan Helpman, 2006. "Trade, FDI, and the Organization of Firms," NBER Working Papers 12091, National Bureau of Economic Research, Inc.
  7. Wilhelm Kohler, 2004. "International outsourcing and factor prices with multistage production," Economic Journal, Royal Economic Society, vol. 114(494), pages C166-C185, 03.
  8. Long, Ngo Van, 2005. "Outsourcing and technology spillovers," International Review of Economics & Finance, Elsevier, vol. 14(3), pages 297-304.
  9. Hartmut Egger & Peter Egger, 2000. "Outsourcing and skill-specific employment in a small economy: Austria and the fall of the Iron Curtain," Economics working papers 2000-24, Department of Economics, Johannes Kepler University Linz, Austria.
  10. Gorg, Holger & Hanley, Aoife, 2005. "Labour demand effects of international outsourcing: Evidence from plant-level data," International Review of Economics & Finance, Elsevier, vol. 14(3), pages 365-376.
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