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Offshore production and business cycle dynamics with heterogeneous firms

Andrei Zlate ()

Journal of International Economics, 2016, vol. 100, issue C, 34-49

Abstract: To examine the effect of offshoring through vertical FDI on the international transmission of business cycles, I propose a two-country model in which firms endogenously choose the location of their production plants over the business cycle. Firms face a sunk cost to enter the domestic market and an additional fixed cost to produce offshore. As such, the offshoring decision depends on the firm-specific productivity and on fluctuations in the relative cost of effective labor. The model generates a procyclical pattern of offshoring and dynamics along its extensive margin that are consistent with data from Mexico's maquiladora sector. The extensive margin enhances the procyclical response of the value added offshore to expansions in the home economy, as the number of offshoring firms mirrors the dynamics of firm entry at home. As a result, offshoring increases the comovement of output across economies, in line with the empirical evidence.

Keywords: Offshore production; Extensive margin; Heterogeneous firms; Firm entry; Business cycle dynamics; Terms of labor (search for similar items in EconPapers)
JEL-codes: F23 F41 (search for similar items in EconPapers)
Date: 2016
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Working Paper: Offshore Production and Business Cycle Dynamics with Heterogeneous Firms (2016) Downloads
Working Paper: Offshore production and business cycle dynamics with heterogeneous firms (2010) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:100:y:2016:i:c:p:34-49

DOI: 10.1016/j.jinteco.2016.01.004

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