Title

Outsourcing versus FDI in Industry Equilibrium

Author(s)

Gene M. Grossman Gene Grossman (Princeton University)

Elhanan Helpman 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.

Creation Date

2002-12

Section URL ID

WWSEcon

Paper Number

dp219.pdf

URL

http://www.princeton.edu/~grossman/OutsourcingvsFDIJEEA.pdf

File Function

Jel

F12, F23, L22, D23

Keyword(s)

outsourcing, direct foreign investment, multinational corporations, imperfect contracting, intra-industry trade

Suppress

false

Series

4