Working Paper: CEPR ID: DP6008
Authors: Alireza Naghavi; Gianmarco I.P. Ottaviano
Abstract: We propose an endogenous growth model with offshoring to investigate its effects on product innovation and growth in the country of origin. Offshoring is associated with reduced feedback from offshored plants to domestic labs as well as coordination problems between the offshored and domestic divisions of firms. Production and transport cost parameters affect the static decision to relocate plants but not R&D. Hence, offshoring may be chosen by firms when it damages the growth rate of their countries of origin. In particular, if offshoring reduces the feedback from plants to labs, it is likely to bring dynamic losses when the countries of origin are large, especially in sectors in which R&D is cheap and product differentiation is strong. It is also likely to slow growth in sectors in which contractual incompleteness gives a strong bargaining power to offshored divisions in intra-firm transactions.
Keywords: growth; incomplete contracts; innovation; offshoring
JEL Codes: F12; F23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Offshoring (F23) | Reduced feedback from offshored plants to domestic R&D labs (O36) |
| Reduced feedback from offshored plants to domestic R&D labs (O36) | Negative impact on innovation (O36) |
| Negative impact on innovation (O36) | Slower growth in the country of origin (F29) |
| Offshoring (F23) | Dynamic losses in growth (O41) |
| Offshoring weakens feedback from production to R&D (O36) | Slower growth in sectors with contractual incompleteness (J41) |
| Geographical separation of production stages (L23) | Coordination problems (P11) |
| Coordination problems (P11) | Exacerbation of negative effects of offshoring (F69) |
| Lack of effective knowledge spillovers (O36) | Diminished growth potential of the originating country (O57) |