Organizing Offshoring: Middle Managers and Communication Costs
Why do firms decide to offshore certain parts of their production process? What qualifies certain countries as particularly attractive locations to offshore? In this paper we address these questions with a theory of international production hierarchies in which organizations arise endogenously to make efficient use of agents' knowledge. Our theory highlights the role of host-country management skills (middle management) in bringing about the emergence of international offshoring. By shielding top management in the source country from routine problems faced by host country workers, the presence of middle managers improves the efficiency of the transmission of knowledge across countries. The model further delivers the prediction that the positive effect of middle skills on offshoring is weaker, the more advanced are communication technologies in the host country. We provide evidence consistent with this prediction.
Harvard University, University of Chicago, and Princeton University, respectively. We are thankful to Daron Acemoglu for a very helpful discussion at the AEA meetings and for encouraging us to explore the issues studied in this paper. We thank seminar participants at the AEA meetings, Brown University and the NBER ITI meetings, as well as Steve Redding and Doireann Fitzgerald for useful comments.
Antras, Pol, Esteban Rossi-Hansberg, In Helpman, E., Marin D., Verdier T. (eds. The Organization of Firms in the Global Economy. Cambridge: Harvard University Press, 2007.