Leahy, Dermot and Montagna, Catia
Outsourcing Versus FDI in Oligopoly Equilibrium. Dundee Discussion Papers
in Economics No.215.
Department of Economic Studies, University of Dundee.
We consider the make-or-buy decision of oligopolistic firms in an industry in which
final good production requires specialised inputs. Factor price considerations dictate
that firms acquire the intermediate abroad, by either producing it in a wholly owned
subsidiary or outsourcing it to a supplier who must make a relationship specific
investment. Firms’ internationalisation mode depends on cost and strategic
considerations. Crucially, asymmetric equilibria emerge, with firms choosing different
modes of internationalisation, even when they are ex-ante identical. With ex-ante
asymmetries, lower cost producers have a stronger incentive to vertically integrate
(FDI), while higher cost firms are more likely to outsource.
||We wish to thank participants at the SIRE Conference on Spatial
Economics and Trade at University of Strathclyde for comments on an
earlier version of this paper. Dermot Leahy acknowledges the support
of the Science Foundation Ireland Research Frontiers Programme
(grant MAT017). The usual disclaimer applies.
||Outsourcing; Foreign Direct Investment; Trade Liberalisation; Oligopoly;
||Faculty of Social Sciences > Economics, Finance and Accounting
||06 Oct 2011 15:24
||Department of Economic Studies, University of Dundee
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