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Temporary Shocks and Offshoring: The Role of External Economies and Firm Heterogeneity

Author

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  • Mitra, Devashish

    (Syracuse University)

  • Ranjan, Priya

    (University of California, Irvine)

Abstract

We construct a model of offshoring with externalities and firm heterogeneity. Due to the presence of externalities, temporary shocks like the Y2K problem can have permanent effects, i.e., they can permanently raise the extent of offshoring in an industry. Also, the initial advantage of a country as a potential host for outsourcing activities can create a lock in effect, whereby late movers have a comparative disadvantage. Furthermore, the existence of firm heterogeneity along with externalities can help explain the dynamic process of offshoring, where the most productive firms offshore first and the others follow later. Finally, we work out some unexpected welfare implications which show that net industry profits can be lower in an outsourcing equilibrium than in a regime of no outsourcing. Consumer welfare rises, and under fairly plausible conditions this effect can offset the negative impact on profits.

Suggested Citation

  • Mitra, Devashish & Ranjan, Priya, 2007. "Temporary Shocks and Offshoring: The Role of External Economies and Firm Heterogeneity," IZA Discussion Papers 2811, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp2811
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    References listed on IDEAS

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    Cited by:

    1. Escaith, Hubert & Lindenberg, Nannette & Miroudot, Sébastien, 2010. "International supply chains and trade elasticity in times of global crisis," WTO Staff Working Papers ERSD-2010-08, World Trade Organization (WTO), Economic Research and Statistics Division.
    2. Devashish Mitra & Priya Ranjan, 2007. "Offshoring and Unemployment," Working Papers 060719, University of California-Irvine, Department of Economics.
    3. Jung, Jaewon & Mercenier, Jean, 2014. "On modeling task, skill and technology upgrading effects of globalization with heterogeneous labor," Economic Modelling, Elsevier, vol. 39(C), pages 49-62.
    4. 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.
    5. Fabrice Defever, 2011. "Incomplete Contracts and the Impact of Globalization on Consumer Welfare," CESifo Working Paper Series 3484, CESifo.
    6. Mitra, Devashish & Ranjan, Priya, 2009. "Offshoring and Unemployment: The Role of Search Frictions and Labor Mobility," IZA Discussion Papers 4136, Institute of Labor Economics (IZA).
    7. Arijit Mukherjee & Yingyi Tsai, 2010. "International Outsourcing And Welfare Reduction: An Entry‐Deterrence Story," Manchester School, University of Manchester, vol. 78(6), pages 647-659, December.

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    More about this item

    Keywords

    Y2K; complementarity; offshoring; outsourcing;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations

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