OUTSOURCING VERSUS FDI IN OLIGOPOLY EQUILIBRIUM

Dermot Leahy and Catia Montagna

No 215, Dundee Discussion Papers in Economics from Economic Studies, University of Dundee

Abstract: We consider the make-or-buy decision of oligopolistic firms in an industry in which final good production requires specialised inputs. Factor price considerations dictate that firms acquire the intermediate abroad, by either producing it in a wholly owned subsidiary or outsourcing it to a supplier who must make a relationship specific investment. Firms’ internationalisation mode depends on cost and strategic considerations. Crucially, asymmetric equilibria emerge, with firms choosing different modes of internationalisation, even when they are ex-ante identical. With ex-ante asymmetries, lower cost producers have a stronger incentive to vertically integrate (FDI), while higher cost firms are more likely to outsource.

Keywords: Outsourcing; Foreign Direct Investment; Trade Liberalisation; Oligopoly (search for similar items in EconPapers)
JEL-codes: F12 F23 L13 L14 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2008-08
New Economics Papers: this item is included in nep-com, nep-int and nep-mic
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Related works:
Working Paper: Outsourcing versus FDI in oligopoly equilibrium (2008)
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