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A Model of Outsourcing and Foreign Direct Investment
Author(s) -
Stähler Frank
Publication year - 2007
Publication title -
review of development economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.531
H-Index - 50
eISSN - 1467-9361
pISSN - 1363-6669
DOI - 10.1111/j.1467-9361.2007.00414.x
Subject(s) - outsourcing , spillover effect , foreign direct investment , investment (military) , order (exchange) , economics , production (economics) , industrial organization , business , knowledge process outsourcing , microeconomics , general equilibrium theory , macroeconomics , finance , marketing , politics , political science , law
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.