FDI, International Outsourcing and Linkages

Carlo Altomonte () and Chiara Bonassi
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Chiara Bonassi: ISLA-Università Bocconi

No 155, KITeS Working Papers from KITeS, Centre for Knowledge, Internationalization and Technology Studies, Universita' Bocconi, Milano, Italy

Abstract: We investigate the trade-off between FDI and international outsourcing of interme-diate inputs by a producer of a final good. To this extent, we characterize an industry equilibrium where fixed sunk costs exist for the setting up of foreign subsidiaries and the latter are heterogeneous in productivity levels. We relate the resulting trade-off between outsourcing and FDI to the degree of contract completeness prevailing in the host country and explore its implications in terms of linkages existing between final producers and local suppliers. We find that an increase in competition levels has a non-monotonic effect on the profit of the local suppliers. Therefore, the host country has an incentive to contrast the entry of new final producers with a reduction in the degree of contract completeness.

Keywords: FDI; outsourcing; imperfect contracting; spillovers (search for similar items in EconPapers)
JEL-codes: D23 F12 L22 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2004-04, Revised 2004-04
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