Offshoring
Offshoring
Offshoring
Offshoring/Outsourcing
• Firms (MNEs) choose not to do certain production stages in-house but
to outsource to other firms (e.g. Pharma, sotware)
• Questions:
• What stages are likely to be outsourced under what conditions?
• What is impact of outsourcing on wage inequality in both sending and
receiving countries?
• How do predictions compare with Heckscher Ohlin Model?
A simple production process
Production
Assembly of Sales and
R&D of
Components Mktg
Components
Production Process as per Skill Intensity
Production
Assembly of Sales and
of R&D
Components Mktg
Components
Assumptions
• Home (sending) and away (receiving) countries
• Ws>Ws*, WL>WL*
• > OR <
• Assume cost of outsourcing any activity is same
• Home country would have economic incentive to outsource least skill
intensive stages of production
• This is “Slicing the Value Chain”
Slicing the Value Chain As costs of offshoring↓ , more
profitable for firms to offshore more
skill-intensive stages of value chain
Production
Assembly of Sales and
of R&D
Components Mktg
Components
Situation during basic offshoring of least skill
intensive stage
Home Assume so far
Ws/WL S
only assembly
(Ws/WL )0 activity is
outsourced
D
S/L
(S/L)0
S* Foreign
Ws */WL *
(Ws */WL *)0
D*
S*/L*
(S*/L*)0
Situation Wdue
/W
to increase in offshoring
s L As offshoring cost ↓, component prod’n
is also outsourced
Home
S
Relative factor dd in home country shifts
(Ws/WL )0 to right.
D1
Wage inequality in home country ↑
D