A model of outsourcing and foreign direct investment

This paper presents a model in which two firms may use foreign direct investment or outsourcing in order to reduce the production cost of an intermediate input. Outsourcing requires training which is costly and creates a positive spillover. The paper shows that the equilibrium depends on the level of training costs. If they are high, only bilateral outsourcing is possible in equilibrium. If bilateral outsourcing is incomplete, it will not change prices compared to no outsourcing. If they are low, only complete outsourcing is possible. If complete outsourcing is unilateral (bilateral), the price increases (decreases) with the degree of spillovers.UnpublishedBrander, J.A., Spencer, B.J. (1983), Strategic Commitment with R&D: The Symmetric Case, Bell Journal of Economics, 14: 225-235. Bulow, J., Geanakoplos, J., Klemperer, P. (1985), Multimarket oligopoly: Strategic substitutes and complements, Journal of Political Economy, 93: 488-511. De Santis, R.A., Stähler, F. (2004), Endogenous Market Structures and the Gains from Foreign Direct Investment, Journal of International Economics, 64: 545-565. Elberfeld, W., Götz, G., Stähler, F. (2005), Vertical Foreign Direct Investment, Welfare and Employment, Topics in Economic Analysis and Policy, 5, No. 1, Article 3 (http://www.bepress.com/bejeap/topics/vol5/iss1/art3). Feenstra, R.C. (1998), Integration of Trade and Disintegration of Production in the Global Economy, Journal of Economic Perspectives, 12,4:31-50. Grossman, G., Helpman, E. (2002a), Outsourcing in a Global Economy, NBRE Working paper 8728, national Bureau of Economic Research, Cambridge, Mass. Grossman, G., Helpman, E. (2002b), Integration versus Outsourcing in Industry Equilibrium, Quarterly Journal of Economics,117:85-120. Grossman, G., Helpman, E. (2003), Outsourcing versus FDI in Industry Equilibrium, Journal of the European Economic Association, 1: 317-327. Helpman, E. (1984), ’A simple theory of trade with multinational corporations’, Journal of Political Economy, 92: 451-571. Helpman, E., Krugman, P.R. (1985), Market Structure and Foreign Trade, MIT Press, Cambridge. Horstmann, I.J., Markusen, J.R. (1992), ’Endogenous market structures in international trade (natura facit saltum)’, Journal of International Economics, 32: 109-129. Hummels, D., Ishii, J., Yi, K. (2001), The nature and growth of vertical specialization in world trade, Journal of International Economics, 54: 75-96. Keller, W. (2004), International Technology Diffusion, Journal of Economic Literature, 42: 752-782. Van Long, N. (2005), Outsourcing and technology spillovers, International Review of Economics and Finance, 14: 297-304. Marin, D., Verdier, T. (2003), Globalization and the New Enterprise, Journal of the European Economic Association, 1: 337-344. Markusen, J.R. (1984), ’Multinationals, multi-plant economies, and the gains from trade’, Journal of International Economics, 16: 205-226. Markusen, J.R. (2002). Multinational firms and the theory of international trade. MIT Press, Cambridge, MA. Markusen, J.R., Venables, A.J. (1998), ’Multinational firms and the new trade theory’, Journal of International Economics, 46: 183-203. Markusen, J.R. and Venables, A.J. (2000), The theory of endowment, intra-industry, and multinational trade, Journal of International Economics, 52: 209-234