The Relationship Between Offshoring, Growth and Welfare

A dynamic model of offshoring is studied which permits the analysis of how offshoring can affect economic and welfare outcomes. Firm owners make location decisions based on the future returns from locating in either foreign or domestic markets, or ceasing operations altogether. It is shown that increased offshoring can raise growth and welfare in both the domestic and foreign economies. Imposing a tax on firms that relocate abroad can make firms delay this move, but at the cost of lowering both domestic and foreign welfare, as well as growth. A tax on domestic profits has an ambiguous impact on growth, while lowering domestic welfare. The effect that these policy or parameter changes have on domestic income inequality, and international wage inequality is also studied. In contrast to the view that the economic impact of outsourcing is equivalent to that of admitting more immigrants, the present model implies that these policies are nearly the opposite of each other. Immigration reduces growth, and lowers the welfare of both foreign and domestic agents.