On the choice of in-house production versus outsourcing by multinationals

Alyson Ma

Journal of International Trade & Economic Development, 2006, vol. 15, issue 2, pages 231-254

Abstract: The global economy is becoming more integrated with the increase in international fragmentation. This paper examines two forms of global production networks in a general equilibrium framework by building on the 'knowledge-capital model.’ The focus is the relationship between country characteristics and the multinational firm's choice either to allocate the labor-intensive processing stage in-house to its foreign affiliates or to outsource the activity to outside contractors at arm's-length. Chinese data on the export processing trade are used to test the theory. The findings show that multinational firms with their headquarters in highly skilled-labor-abundant countries of intermediate size have a preference for outsourcing. By contrast, skilled-labor-abundant countries of small size are homes to multinational firms with subsidiary production in the host country where unskilled labor is cheap.

Keywords: Outsourcing; multinational firm; imperfect competition; vertical integration; trade (search for similar items in EconPapers)
Date: 2006
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