TY - JOUR
T1 - Temporary shocks and offshoring
T2 - The role of external economies and firm heterogeneity
AU - Mitra, Devashish
AU - Ranjan, Priya
PY - 2008/8
Y1 - 2008/8
N2 - We construct a model of offshoring with externalities and firm heterogeneity. Due to the presence of externalities, temporary shocks like the Y2K problem can have permanent effects, i.e., they can permanently raise the extent of offshoring in an industry. Also, the initial advantage of a country as a potential host for outsourcing activities can create a lock in effect, whereby late movers have a comparative disadvantage. Furthermore, the existence of firm heterogeneity along with externalities can help explain the dynamic process of offshoring, where the most productive firms offshore first and the others follow later. Finally, we work out some unexpected welfare implications which show that net industry profits can be lower in an outsourcing equilibrium than in a regime of no outsourcing. Consumer welfare rises, and under fairly plausible conditions this effect can offset the negative impact on profits.
AB - We construct a model of offshoring with externalities and firm heterogeneity. Due to the presence of externalities, temporary shocks like the Y2K problem can have permanent effects, i.e., they can permanently raise the extent of offshoring in an industry. Also, the initial advantage of a country as a potential host for outsourcing activities can create a lock in effect, whereby late movers have a comparative disadvantage. Furthermore, the existence of firm heterogeneity along with externalities can help explain the dynamic process of offshoring, where the most productive firms offshore first and the others follow later. Finally, we work out some unexpected welfare implications which show that net industry profits can be lower in an outsourcing equilibrium than in a regime of no outsourcing. Consumer welfare rises, and under fairly plausible conditions this effect can offset the negative impact on profits.
KW - Complementarity
KW - F12
KW - F23
KW - O19
KW - Offshoring
KW - Outsourcing
KW - Y2K
UR - http://www.scopus.com/inward/record.url?scp=43449131536&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=43449131536&partnerID=8YFLogxK
U2 - 10.1016/j.jdeveco.2007.09.005
DO - 10.1016/j.jdeveco.2007.09.005
M3 - Article
AN - SCOPUS:43449131536
SN - 0304-3878
VL - 87
SP - 76
EP - 84
JO - Journal of Development Economics
JF - Journal of Development Economics
IS - 1
ER -