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Outsourcing versus FDI in Industry Equilibrium

Author

Listed:
  • Gene M. Grossman

    (Princeton University)

  • Elhanan Helpman

    (Harvard University, Tel Aviv University, and CIAR)

Abstract

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.

Suggested Citation

  • Gene M. Grossman & Elhanan Helpman, 2002. "Outsourcing versus FDI in Industry Equilibrium," Working Papers 148, Princeton University, School of Public and International Affairs, Discussion Papers in Economics.
  • Handle: RePEc:pri:wwseco:dp219.pdf
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    File URL: http://www.princeton.edu/~grossman/OutsourcingvsFDIJEEA.pdf
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    References listed on IDEAS

    as
    1. Dalia Marin & Thierry Verdier, 2008. "Power Inside The Firm and The Market: A General Equilibrium Approach," Journal of the European Economic Association, MIT Press, vol. 6(4), pages 752-788, June.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    outsourcing; direct foreign investment; multinational corporations; imperfect contracting; intra-industry trade;
    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
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights

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