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 arms-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 arms-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
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
OUTSOURCING VERSUS FDI IN INDUSTRY EQUILIBRIUM
Gene M.Grossman
Elhanan Helpman
Working Paper 9300
http://www.nber.org/papers/w9300
October 2002
GLOBAL SOURCING
Pol Antràs
Elhanan Helpman
Working Paper 10082
http://www.nber.org/papers/w10082
November 2003
OUTSOURCING IN A GLOBAL ECONOMY
Gene M. Grossman
Elhanan Helpman
Working Paper 8728
http://www.nber.org/papers/w8728
January 2002
Globalization, Outsourcing, and Wage Inequality
Robert C. Feenstra
Gordon H. Hanson
January 1996
Global Production Sharing and Rising Inequality: A Survey of Trade and wages
Robert C. Feenstra
Gordon H. Hanson
2001
TRADE, FDI, AND THE ORGANIZATION OF FIRMS
Elhanan Helpman
Working Paper 12091
http://www.nber.org/papers/w12091
March 2006
HOME AND HOST COUNTRY EFFECTS OF FDI
Robert E. Lipsey
Working Paper 9293
http://www.nber.org/papers/w9293
October 2002
Chapter Title: Introduction to “Foreign Direct Investment”
Chapter Author: Kenneth A. Froot
Chapter URL: http://www.nber.org/chapters/c6531
1992
Chapter Title: Where Are the Multinationals Headed?
Chapter Author: Raymond Vernon
Chapter URL: http://www.nber.org/chapters/c6534
1992
Determinants of Foreign Direct Investment: A Sectoral and Institutional
Approach
James P. Walsh and Jiangyan Yu
2010
DETERMINANTS OF FOREIGN DIRECT INVESTMENT
Bruce A. Blonigen
Jeremy Piger
Working Paper 16704
http://www.nber.org/papers/w16704
January 2011
Determinants of Foreign Direct Investment in Developing Countries: A Comparative Analysis
Khondoker Abdul Mottaleba
Kaliappa Kalirajanb
2010
Determinants of Foreign Direct Investment
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
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,
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
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.
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
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
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
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
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
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
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
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
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
Viewpoints which Matter 