International Outsourcing and R&D: Long‐Run Implications for Consumers*

Sugata Marjit and Arijit Mukherjee

Review of International Economics, 2008, vol. 16, issue 5, 1010-1022

Abstract: We show that international outsourcing and R&D by the outsourced firm may be either substitutes or complements. Outsourcing increases the R&D investment in small markets and in highly competitive product markets, whereas it decreases the R&D investment in large markets. If the outsourced firm can be technologically very efficient under exporting, outsourcing can make the consumers worse off by reducing the R&D investment. If there is skill differential in the production process and outsourcing occurs only in the unskilled activities, R&D‐reducing outsourcing occurs in a relatively low‐skilled industry. If outsourcing of the unskilled jobs reduces the effective cost of the skilled workers by increasing the productivities of the skilled workers, outsourcing provides further disincentive for R&D compared to the situation where outsourcing of the unskilled jobs does not affect the effective cost of the skilled workers.

Date: 2008
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