Interdependent product cycles for globally sourced intermediates

Johannes Van Biesebroeck and Lijun Zhang

Journal of International Economics, 2014, vol. 94, issue 1, 143-156

Abstract: We analyze a firm that produces a final good from multiple intermediates, each of which can be sourced domestically or from a low-wage country. Offshoring an intermediate is only profitable when it has matured sufficiently and the savings in production cost outweigh the underinvestment due to incomplete contracts abroad. We derive how equilibrium sourcing decisions of different intermediates depend on one another. In particular, we demonstrate that the maturity threshold to offshore additional parts is higher when some other parts are already sourced from the low-wage country. This prediction is robust to an alternative way of modeling the bargaining process, but it only holds if foreign suppliers are held sufficiently close to their reservation wage. If suppliers are able to capture most of the rents, the prediction reverses. Using information on U.S. imports of automotive parts, we illustrate that for most countries the price at which they first export a part tends to be higher for parts that are only exported later, consistent with offshoring becoming gradually more difficult.

Keywords: Outsourcing; Offshoring; Property rights; Global value chains (search for similar items in EconPapers)
JEL-codes: D23 F12 L23 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (6)

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Related works:
Working Paper: Global Sourcing of a Complex Good (2011)
Working Paper: Global sourcing of a complex good (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:94:y:2014:i:1:p:143-156

DOI: 10.1016/j.jinteco.2014.06.005

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