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The Determinants of Outward Processing: Evidence from Offshoring Intermediates by the European Union

  • Dimitra Petropoulou

    ()

    (Department of Economics, University of Sussex, Brighton, United Kingdom)

  • Xavier Cirera

    ()

    (Institute of Development Studies, University of Sussex, Brighton, United Kingdom)

  • Dirk Willenbockel

    ()

    (Institute of Development Studies, University of Sussex, Brighton, United Kingdom)

This paper analyses the determinants of outward processing (OP) trade; specifically, imports of intermediates subsequent to processing abroad. A model where firms choose between OP and importing intermediates directly from a third country (generic offshoring, GO) predicts higher tariffs, lower monitoring costs and higher quality make OP more likely, while better institutions and rule of law abroad lower contractual breakdown risk under GO making OP less likely. Analysis of EU trade data from 2002 to 2008 emphasizes proximity, quality differentiation and weaker rule of law as OP determinants. Results suggest relationship-specific investments and monitoring under OP may offset contractual uncertainty.

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Paper provided by Department of Economics, University of Sussex in its series Working Paper Series with number 5413.

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Date of creation: Jan 2013
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Handle: RePEc:sus:susewp:5413
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  1. Andrei A. Levchenko, 2004. "Institutional Quality and International Trade," IMF Working Papers 04/231, International Monetary Fund.
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  7. 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.
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  14. Xavier Cirera, 2010. "The Impact of trade preferences on export prices in the European Union - who captures the preference rent?," Working Paper Series 1510, Department of Economics, University of Sussex.
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