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Firm Heterogeneity, Contract Enforcement, and the Industry Dynamics of Offshoring *
Author(s) -
Naghavi Alireza,
Ottaviano Gianmarco
Publication year - 2009
Publication title -
the scandinavian journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.725
H-Index - 64
eISSN - 1467-9442
pISSN - 0347-0520
DOI - 10.1111/j.1467-9442.2009.01587.x
Subject(s) - offshoring , economics , subsidy , production (economics) , microeconomics , upstream (networking) , endogenous growth theory , consumption (sociology) , inefficiency , welfare , incomplete contracts , industrial organization , business , market economy , incentive , human capital , outsourcing , marketing , computer network , social science , sociology , computer science
We develop an endogenous growth model with R&D spillovers to study the long‐run consequences of offshoring with firm heterogeneity and incomplete contracts. In so doing, we model offshoring as the geographical fragmentation of a firm's production chain between a home upstream division and a foreign downstream division. While there is always a positive correlation between upstream bargaining weight and offshoring activities, there is an inverted U‐shaped relationship between these and growth. Whether offshoring with incomplete contracts also increases consumption depends on firm heterogeneity. As for welfare, whereas with complete contracts an R&D subsidy is enough to solve the inefficiency due to R&D spillovers, with incomplete contracts a production subsidy is also needed.