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Financial Advantage, Outsourcing and FDI Under Wage Uncertainity

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  • Choi, E. Kwan
  • Choi, Jai-Young

Abstract

This paper investigates outsourcing and foreign direct investment (FDI) decisions in North–South trade under conditions of wage uncertainty. The North has a financial advantage to raise capital, but the South has the advantage of low wages. If the expected outsourcing cost is lower than the in-house production cost, some outsourcing to a Southern firm is optimal. However, outsourcing to an FDI firm is superior to outsourcing to a Southern firm as well as in-house production. This finding is consistent with the rising foreign direct investment in China by Northern firms.

Suggested Citation

  • Choi, E. Kwan & Choi, Jai-Young, 2013. "Financial Advantage, Outsourcing and FDI Under Wage Uncertainity," Staff General Research Papers Archive 36077, Iowa State University, Department of Economics.
  • Handle: RePEc:isu:genres:36077
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    References listed on IDEAS

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    1. Wilhelm Kohler, 2004. "International outsourcing and factor prices with multistage production," Economic Journal, Royal Economic Society, vol. 114(494), pages 166-185, March.
    2. Kikuchi, Toru & Long, Ngo Van, 2010. "A simple model of service offshoring with time zone differences," The North American Journal of Economics and Finance, Elsevier, vol. 21(3), pages 217-227, December.
    3. Ravi Batra & Hamid Beladi, 2010. "A Simple Two-Sector Model of Outsourcing," Review of Development Economics, Wiley Blackwell, vol. 14(1), pages 64-73, February.
    4. Chi-Chur Chao & Eden S. H. Yu, 2014. "Content Protection, Urban Unemployment, and Welfare," World Scientific Book Chapters,in: TRADE-RELATED INVESTMENT MEASURES Theory and Applications, chapter 8, pages 127-140 World Scientific Publishing Co. Pte. Ltd..
    5. Reza Oladi, 2004. "Strategic quotas on foreign investment and migration," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 24(2), pages 289-306, August.
    6. Long, Ngo Van, 2005. "Outsourcing and technology spillovers," International Review of Economics & Finance, Elsevier, vol. 14(3), pages 297-304.
    7. 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.
    8. 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.
    9. Reza Oladi & John Gilbert & Hamid Beladi, 2011. "Foreign Direct Investment, Non‐Traded Goods And Real Wages," Pacific Economic Review, Wiley Blackwell, vol. 16(1), pages 36-41, February.
    10. Ravi Batra & Hamid Beladi, 2010. "Outsourcing and the Heckscher-Ohlin Model," Review of International Economics, Wiley Blackwell, vol. 18(2), pages 277-288, May.
    11. MacDermott, Raymond, 2007. "Regional trade agreement and foreign direct investment," The North American Journal of Economics and Finance, Elsevier, vol. 18(1), pages 107-116, February.
    12. 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.
    13. Jones, Ronald W., 2005. "Immigration vs. outsourcing: Effects on labor markets," International Review of Economics & Finance, Elsevier, vol. 14(2), pages 105-114.
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    Cited by:

    1. Hamid Beladi & Reza Oladi, 2014. "On Offshoring and Trade Deficit," Review of Development Economics, Wiley Blackwell, vol. 18(3), pages 517-523, August.
    2. Mandal, Biswajit & Prasad, Alaka Shree & Bhattacharjee, Prasun, 2017. "A Review of Literature on Time Zone Difference and Trade," MPRA Paper 78779, University Library of Munich, Germany.
    3. Zhou, Yiming & Zeng, Dao-Zhi, 2015. "Offshoring, globalization, and welfare," The North American Journal of Economics and Finance, Elsevier, vol. 31(C), pages 75-93.

    More about this item

    Keywords

    outsourcing; foreign direct investment;

    JEL classification:

    • F1 - International Economics - - Trade

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