A model of outsourcing and foreign direct investment

Stähler, Frank

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A model of outsourcing and foreign direct investment

Stähler, Frank

Cite this item: Stähler, F. (2005). A model of outsourcing and foreign direct investment (Economics Discussion Papers Series No. 516). University of Otago. Retrieved from http://hdl.handle.net/10523/859

Permanent link to OUR Archive version: http://hdl.handle.net/10523/859

Date: 2005-12

Publisher: University of Otago

Pages: 20

Series: Economics Discussion Papers Series

Series number: 516

Keywords: outsourcing; Foreign direct investment

Research Type: Discussion Paper

Abstract:

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.

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