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Offshore production and business cycle dynamics with heterogeneous firms

Andrei Zlate ()

No 995, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Cross-country variation in production costs encourages the relocation of production facilities to other countries, a process known as offshoring through vertical foreign direct investment. I examine the effect of offshoring on the international transmission of business cycles. Unlike the existing macroeconomic literature, I distinguish between fluctuations in the number of offshoring firms (the extensive margin) and in the value added per offshoring firm (the intensive margin) as separate transmission mechanisms. The firms' decision to produce offshore depends on the firm-specific level of labor productivity, on fluctuations in the relative cost of effective labor, and on the fixed and trade costs of offshoring. The model replicates the procyclical pattern of offshoring and the dynamics along its two margins, which I document using data from U.S. manufacturing and Mexico's maquiladora sectors. Offshoring enhances the synchronization of business cycles, and dampens the real exchange rate appreciation generated by aggregate productivity differentials across countries.

Keywords: Business; cycles (search for similar items in EconPapers)
Date: 2010, Revised 2010
New Economics Papers: this item is included in nep-bec, nep-dge, nep-int, nep-mac and nep-opm
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Related works:
Journal Article: Offshore production and business cycle dynamics with heterogeneous firms (2016) Downloads
Working Paper: Offshore Production and Business Cycle Dynamics with Heterogeneous Firms (2016) Downloads
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