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Outsourcing versus FDI in Industry Equilibrium

  • Gene M. Grossman
  • Elhanan Helpman

We study the determinants of the extent of outsourcing and of direct foreign investment in an industry in which producers need specialized components. Potential suppliers must make a relationship-specific investment in order to serve each prospective customer. Such investments are governed by imperfect contracts. A final-good producer can manufacture components for itself, but the per-unit cost is higher than for specialized suppliers. We consider how the size of the cost differential, the extent of contractual incompleteness, the size of the industry, and the relative wage rate affect the organization of industry production.

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File URL: http://www.nber.org/papers/w9300.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9300.

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Date of creation: Nov 2002
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Publication status: published as Gene M. Grossman & Elhanan Helpman, 2003. "Outsourcing Versus FDI in Industry Equilibrium," Journal of the European Economic Association, MIT Press, vol. 1(2-3), pages 317-327, 04/05.
Handle: RePEc:nbr:nberwo:9300
Note: IO ITI PR
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  1. Robert C. Feenstra, . "Integration Of Trade And Disintegration Of Production In The Global Economy," Department of Economics 98-06, California Davis - Department of Economics.
  2. Grossman, G.M. & Helpman, E., 2002. "Outsourcing in a Global Economy," Papers 218, Princeton, Woodrow Wilson School - Public and International Affairs.
  3. Diego Puga & Daniel Trefler, 2002. "Knowledge Creation and Control in Organizations," NBER Working Papers 9121, National Bureau of Economic Research, Inc.
  4. Philippe Aghion & Jean Tirole, 1994. "Formal and Real Authority in Organizations," Working papers 95-8, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. Marin, Dalia & Verdier, Thierry, 2002. "Power Inside the Firm and the Market: a General Equilibrium Approach," CEPR Discussion Papers 3526, C.E.P.R. Discussion Papers.
  6. Ronald W. Jones, 2000. "Globalization and the Theory of Input Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 026210086x, June.
  7. Jose Campa & Linda S. Goldberg, 1997. "The Evolving External Orientation of Manufacturing Industries: Evidence from Four Countries," NBER Working Papers 5919, National Bureau of Economic Research, Inc.
  8. Gene M. Grossman & Elhanan Helpman, 2002. "Integration Versus Outsourcing In Industry Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 117(1), pages 85-120, February.
  9. Gordon H. Hanson & Raymond J. Mataloni, Jr. & Matthew J. Slaughter, 2001. "Expansion Strategies of U.S. Multinational Firms," NBER Working Papers 8433, National Bureau of Economic Research, Inc.
  10. David Hummels & Jun Ishii & Kei-Mu Yi, 1999. "The nature and growth of vertical specialization in world trade," Staff Reports 72, Federal Reserve Bank of New York.
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