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Y2K and Offshoring: The Role of External Economies and Firm Heterogeneity

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  • Devashish Mitra
  • Priya Ranjan

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 show the possibility of complementarity between two modes of offshoring: FDI and offshore outsourcing.

Suggested Citation

  • Devashish Mitra & Priya Ranjan, 2005. "Y2K and Offshoring: The Role of External Economies and Firm Heterogeneity," NBER Working Papers 11718, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:11718
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    Cited by:

    1. Mitra, Devashish & Ranjan, Priya, 2008. "Temporary shocks and offshoring: The role of external economies and firm heterogeneity," Journal of Development Economics, Elsevier, vol. 87(1), pages 76-84, August.
    2. Hübler, Michael, 2007. "A simple model of outsourcing with Cournot competition," Kiel Working Papers 1320, Kiel Institute for the World Economy.

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