FDI vs Outsourcing: Extending Boundaries or Extending Network Chains of Firms

FDI vs Outsourcing: Extending Boundaries or Extending Network Chains of Firms

 

Foreign Direct Investments of Firms can have three objectives:

  • Vertical Integration (Control of Supply Chain)
  • Horizontal Integration (Seeking Market Share)
  • Diversification ( Market Seeking)

In this post, Focus is on Sourcing of Goods and Services in FDI and Outsourcing Decisions of Firms.  That means focusing on supply chain related issues.

 

From GLOBAL SOURCING

A fi…rm that chooses to keep the production of an intermediate input within its boundaries can produce it at home or in a foreign country. When it keeps it at home, it engages in standard vertical integration. And when it makes it abroad, it engages in foreign direct investment (FDI) and intra-…firm trade. Alternatively, a …firm may choose to outsource an input in the home country or in a foreign country. When it buys the input at home, it engages in domestic outsourcing. And when it buys it abroad, it engages in foreign outsourcing, or arm’s-length trade.

Intel Corporation provides an example of the FDI strategy; it assembles most of its microchips in wholly-owned subsidiaries in China, Costa Rica, Malaysia, and the Philippines. On the other hand, Nike provides an example of the arm’s-length import strategy; it subcontracts most of its manufacturing to independent producers in Thailand, Indonesia, Cambodia, and Vietnam.

 

 

Intermediate Goods – Make vs.  Buy Decisions of Firms

 

Outsourcing2

 

From Integration of Trade and Disintegration of Production in the Global Economy

 

The rising integration of world markets has brought with it a disintegration of the production process, in which manufacturing or services activities done abroad are combined with those performed at home. Companies are now finding it profitable to outsource increasing amounts of the production process, a process which can happen either domestically or abroad. This represents a breakdown in the vertically-integrated mode of production – the so-called “Fordist” production, exemplified by the automobile industry – on which American manufacturing was built. A number of prominent researchers have referred to the importance of the idea that production occurs internationally: Bhagwati and Dehejia (1994) call this “kaleidoscope comparative advantage,” as firms shift location quickly; Krugman (1996) uses the phrase “slicing the value chain”; Leamer (1996) prefers “delocalization;” while Antweiler and Trefler (1997) introduce “intra-mediate trade.” There is no single measure that captures the full range of these activities, but I shall compare several different measures of foreign outsourcing, and argue that they have all increased since the 1970s.

 

Types of Supply Chain Relations:

  • Intra-firm Trade of MNCs
  • Foreign Outsourcing
  • Domestic Outsourcing
  • Vertical Integration

 

Key Terms:

  • Production Sharing
  • Vertical Integration
  • Fragmentation of Production
  • Global Value Chains
  • Outsourcing
  • Delocalization
  • Intermediate Goods Trade
  • FDI
  • Domestic Outsourcing
  • Production Offshoring
  • Onshoring
  • Economic Globalization
  • Value Added Tasks
  • Intra-firm Trade
  • Multinational Firms
  • Vertical Specialization
  • Vertical Disintegration
  • Transaction Cost Economics
  • Trade in Value Added Tasks
  • Vertical Production Networks
  • Production Unbundling

 

Key Sources of Research:

PHYSICAL CAPITAL, KNOWLEDGE CAPITAL AND THE CHOICE BETWEEN FDI AND OUTSOURCING

Yongmin Chen
Ignatius J. Horstmann
James R. Markusen

Working Paper 14515
http://www.nber.org/papers/w14515

December 2008

Click to access w14515.pdf

 

 

OUTSOURCING VERSUS FDI IN INDUSTRY EQUILIBRIUM

Gene M.Grossman
Elhanan Helpman

Working Paper 9300
http://www.nber.org/papers/w9300

October 2002

Click to access w9300.pdf

 

 

GLOBAL SOURCING

Pol Antràs
Elhanan Helpman

Working Paper 10082
http://www.nber.org/papers/w10082

November 2003

Click to access w10082.pdf

 

 

OUTSOURCING IN A GLOBAL ECONOMY

Gene M. Grossman
Elhanan Helpman

Working Paper 8728
http://www.nber.org/papers/w8728

January 2002

Click to access w8728.pdf

 

 

 

Globalization, Outsourcing, and Wage Inequality

Robert C. Feenstra

Gordon H. Hanson

January 1996

Click to access w5424.pdf

 

Global Production Sharing and Rising Inequality:  A Survey of Trade and wages

Robert C. Feenstra

Gordon H. Hanson

2001

Click to access w8372.pdf

 

 

TRADE, FDI, AND THE ORGANIZATION OF FIRMS

Elhanan Helpman

Working Paper 12091
http://www.nber.org/papers/w12091

March 2006

Click to access w12091.pdf

 

 

 

HOME AND HOST COUNTRY EFFECTS OF FDI

Robert E. Lipsey

Working Paper 9293
http://www.nber.org/papers/w9293

October 2002

Click to access w9293.pdf

 

 

Chapter Title: Introduction to “Foreign Direct Investment”

Chapter Author: Kenneth A. Froot
Chapter URL: http://www.nber.org/chapters/c6531

1992

Click to access c6531.pdf

 

Chapter Title: Where Are the Multinationals Headed?

Chapter Author: Raymond Vernon
Chapter URL: http://www.nber.org/chapters/c6534

1992

Click to access c6534.pdf

 

 

 

Determinants of Foreign Direct Investment: A Sectoral and Institutional
Approach

James P. Walsh and Jiangyan Yu

2010

Click to access wp10187.pdf

 

 

 

DETERMINANTS OF FOREIGN DIRECT INVESTMENT

Bruce A. Blonigen
Jeremy Piger

Working Paper 16704
http://www.nber.org/papers/w16704

January 2011

Click to access w16704.pdf

 

 

 

Determinants of Foreign Direct Investment in Developing Countries: A Comparative Analysis

Khondoker Abdul Mottaleba
Kaliappa Kalirajanb

2010

Click to access WP2010_13.pdf

 

 

 

Determinants of Foreign Direct Investment

Bruce A. Blonigen

Jeremy Piger

 

2014

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2535582

 

Trends and Determinants of Foreign Direct Investment in South Asia

World Bank

2013

Click to access ACS48460WP0P13055B00PUBLIC00A9RBBB1.pdf

 

 

Determinants of Foreign Direct Investment (FDI)

Yi Feng
Publication Date: Jun 2017

http://politics.oxfordre.com/view/10.1093/acrefore/9780190228637.001.0001/acrefore-9780190228637-e-559

http://politics.oxfordre.com/view/10.1093/acrefore/9780190228637.001.0001/acrefore-9780190228637-e-559?print=pdf

 

 

 

Foreign direct investment (FDI)

Click to access s4IP1_8736.pdf

 

 

 

Foreign Direct Investment and the Multinational Enterprise: An Introduction

Steven Brakman and Harry Garretsen

2008

Click to access 9780262026451_sch_0001.pdf

 

 

 

AN EXTENSIVE EXPLORATION OF THEORIES OF FOREIGN DIRECT INVESTMENT

Patricia Lindelwa Makoni

Click to access 10-22495_rgcv5i2c1art1.pdf

 

 

 

A selective review of foreign direct investment theories.

Nayak, Dinkar and Rahul N. Choudhury (2014).

ARTNeT Working Paper Series No. 143, March 2014,

Click to access 782793517.pdf

 

 

Integration of Trade and Disintegration of Production in the Global Economy

Robert C. Feenstra

Revised, April 1998

 

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.39.7178&rep=rep1&type=pdf

 

 

 

The Distributional Effects of International Fragmentation,

Kohler, Wilhelm (2002)

Working Paper, Department of Economics, Johannes Kepler University of Linz, No. 0201

 

Click to access wp0201.pdf

 

 

 

International Fragmentation of Production and the Intrafirm Trade of U.S. Multinational Companies

Maria Borga and William J. Zeile
WP2004-02
January 22, 2004

Paper presented at:

The National Bureau of Economic Research/Conference on Research in Income and Wealth meeting on Firm-level Data, Trade, and Foreign Direct Investment, Cambridge, Massachusetts
August 7-8, 2003,
and
The OECD Committee on Industry and Business Environment/Working Party on Statistics
Session on Globalization,
Paris, France
November 3-4, 2003.

Click to access intrafirmtradejanuary04.pdf

 

 

The governance of global value chains

Gary Gereffi
John Humphrey
Timothy Sturgeon
2005

Click to access GVC_Governance.pdf

 

The economic consequences of increased protectionism

Riksbank of Sweden

2017

Click to access ppr_fordjupning_3_170427_eng.pdf

 

 

 

Deep integration and production networks: an empirical analysis

Gianluca Orefice
Nadia Rocha
World Trade Organization
Manuscript date: July 2011

Click to access ersd201111_e.pdf

 

 

 

Measuring success in the global economy: international trade, industrial
upgrading, and business function outsourcing in global value chains

Timothy J. Sturgeon and Gary Gereffi

Click to access diaeiia200910a1_en.pdf

 

 

 

Topics in International Trade

Reading list

Click to access readings-topics09.pdf

 

 

 

FOREIGN DIRECT INVESTMENT, TRADE, AND GLOBAL PRODUCTION NETWORKS
IN ASIA AND EUROPE

GPN Working Paper 2
October 2002

Click to access gpnwp2.pdf

 

 

Why has world trade grown faster than world output?

Mark Dean

Maria Sebastia-Barriel

Click to access Other_Paper_1.pdf

 

 

Vertical Specialization, Global Value Chains and the changing Geography of Trade: the Portuguese Rubber and Plastics Industry Case

João Carlos Lopes and Ana Santos

Click to access wp122015.pdf

 

 

The changing structure of trade linked to global production systems: What are the policy implications?

William MILBERG

 

Click to access Changing-Structure-of-Trade-Linked-to-Global-Production-Systems.pdf

 

 

WHO PRODUCES FOR WHOM IN THE WORLD ECONOMY?

Guillaume Daudin (Lille-I (EQUIPPE) & Sciences Po (OFCE), Christine Rifflart, Danielle
Schweisguth (Sciences Po (OFCE))1

This version: July 2009

Click to access WP2009-18.pdf

 

THE NATURE AND GROWTH OF VERTICAL SPECIALIZATION IN WORLD TRADE

David Hummels
Jun Ishii
Kei-Mu Yi
March 1999

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.475.3874&rep=rep1&type=pdf

 

Click to access sr72.pdf

 

 

Expansion Strategies of U.S. Multinational Firms

Gordon H. Hanson, Raymond J. Mataloni, and Matthew J. Slaughter

WP2001-01
May 10-11, 2001

Paper presented at:

The Brookings Trade Forum 2001, Washington, D.C.
May 10-11, 2001

Click to access HMS1.PDF

 

 

INTERNATIONAL JOINT VENTURES AND THE BOUNDARIES OF THE FIRM

Mihir A. Desai C. Fritz Foley James R. Hines Jr.

Working Paper 9115 http://www.nber.org/papers/w9115
August 2002

 

Click to access 000000005694_01.PDF

 

 

 

The Globalization of Production

Gordon H. Hanson

 

http://www.nber.org/reporter/spring01/hanson.html

 

 

 

The Politics of Transnational Production Systems A Political Economy Perspective

Helge Hveem
Department of Political Science
University of Oslo

Click to access hveem.pdf

 

 The Architecture of Globalization: A Network Approach to International Economic Integration.

Raja Kali and Javier Reyes

Second Revision: October 9, 2006

Click to access TradeNetwork.pdf

 

 

 

 

 

Paris School of Economics – Summer School on Trade

2017

Click to access trade-sumschool-pse-2017.pdf

 

 

Spain in the global value chains

2017

Click to access beaa1703-art20e.pdf

 

 

 An Outsourcing Bibliography

Foreign Policy magazine

2004

An outsourcing bibliography

 

 

 

OFFSHORING, FOREIGN DIRECT INVESTMENT, AND THE STRUCTURE OF U.S. TRADE

2006

 

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.564.6639&rep=rep1&type=pdf

 

 

 A Survey of Literature on Research of Intra-firm Trade

WANG Li, SHEN Rui

Click to access 2013jrgjgc311b13.pdf

 

 

Global Value Chains

OECD, WTO and World Bank Group
Report prepared for submission to the G20 Trade Ministers Meeting Sydney, Australia, 19 July 2014

Click to access gvc_report_g20_july_2014.pdf

 

 

 

TRADE IN INTERMEDIATE GOODS AND SERVICES

OECD Trade Policy Working Paper No. 93
by Sébastien Miroudot, Rainer Lanz and Alexandros Ragoussis

Click to access 44056524.pdf

 

 

The Boundaries of Multinational Enterprises and the Theory of International Trade

James R. Markusen

 

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.551.4665&rep=rep1&type=pdf

 

 

Incomplete Contracts and the Boundaries of the Multinational Firm

Nathan Nunn

Daniel Trefler

June 2008

Click to access NunnTreflerPaper.pdf

 

 

The Theory of the Firm goes Global

Dalia Marin

2008

Click to access 370.pdf

Author: Mayank Chaturvedi

You can contact me using this email mchatur at the rate of AOL.COM. My professional profile is on Linkedin.com.

4 thoughts on “FDI vs Outsourcing: Extending Boundaries or Extending Network Chains of Firms”

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s