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Offshoring and Heterogeneous Firms: One Job Offshored, One Job Lost?

Nana Bourtchouladze ()
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Nana Bourtchouladze: IUHEI, The Graduate Institute of International Studies, Geneva

No 28-2007, IHEID Working Papers from Economics Section, The Graduate Institute of International Studies

Abstract: Offshoring has gained a significant momentum in recent years. Firm size appears to be the leading factor differentiating firms that offshore from those that do not. We present a model that blends offshoring, or trade in tasks, with a Melitz-style model of monopolistic competition with heterogeneous firms and show that this is indeed the case. Accounting for firm heterogeneity offers new tools for analyzing the effects of offshoring on the employment dynamics within an individual firm and at the aggregate sector level. We show that offshoring unambiguously reduces per-firm labour demand in smaller firms, but has ambiguous effects in larger firms. As a result, irrespective of whether or not the number of firms operating in the offshoring nation increases, the overall sector employment may increase or decrease. Policies promoting free trade have a significant role to play in job creation. The model also permits a straightforward derivation of positive and normative effects of offshoring: trade in tasks increases productivity of active firms and improves welfare in the offshoring nation.

Keywords: Trade in tasks; offshoring; heterogeneous firms; employment; productivity; welfare (search for similar items in EconPapers)
JEL-codes: F12 F16 F29 (search for similar items in EconPapers)
Pages: 55
Date: 2007-12, Revised 2007-12
New Economics Papers: this item is included in nep-bec, nep-int and nep-lab
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