International Organization of Production with Heterogeneous Firms
Erasmus Kersting ()
No 17, Villanova School of Business Department of Economics and Statistics Working Paper Series from Villanova School of Business Department of Economics and Statistics
This paper presents a North-South model with differentiated goods being produced in the North. Each differentiated final good requires both management and manufacturing services as inputs, and firms are heterogeneous with regard to their productivity levels in providing these inputs. Moving manufacturing to the South lowers part of a firm's variable costs. Two scenarios, which are interpreted to correspond to vertical FDI and offshoring, are investigated. In both cases there is a minimum level of management productivity required for firms to benefit from relocation of manufacturing to the South. In the case of offshoring, productivity and profit gains are relatively larger for firms with low initial manufacturing productivity. In addition, firms with very high initial productivity in both aspects choose not to offshore due to the presence of fixed costs. The model is subsequently used to examine the implications of changes in economic integration on the type of firms that exit an industry, change production location or keep manufacturing domestically.
Keywords: Firms; Offshoring; Vertical FDI (search for similar items in EconPapers)
JEL-codes: F15 F23 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-cse and nep-int
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Journal Article: International Organization of Production with Heterogeneous Firms (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:vil:papers:17
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