TY  - JOUR
AU  - Grossman,Gene M.
AU  - Helpman,Elhanan
TI  - Outsourcing versus FDI in Industry Equilibrium
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 9300
PY  - 2002
Y2  - November 2002
UR  - http://www.nber.org/papers/w9300
L1  - http://www.nber.org/papers/w9300.pdf
N1  - Author contact info:
Gene M. Grossman
International Economics Section
Department of Economics
Princeton University
Princeton, NJ 08544
Tel: 609/258-4823
Fax: 609/258-1374
E-Mail: grossman@princeton.edu

Elhanan Helpman
Department of Economics
Harvard University
1875 Cambridge Street
Cambridge, MA 02138
Tel: 617-495-4690
Fax: 617-495-7730
E-Mail: ehelpman@harvard.edu
AB  - We study the determinants of the extent of outsourcing and of direct foreign investment in an industry in which producers need specialized components. Potential suppliers must make a relationship-specific investment in order to serve each prospective customer. Such investments are governed by imperfect contracts. A final-good producer can manufacture components for itself, but the per-unit cost is higher than for specialized suppliers.  We consider how the size of the cost differential, the extent of contractual incompleteness, the size of the industry, and the relative wage rate affect the organization of industry production.
ER  -