Working Paper: NBER ID: w11718
Authors: Devashish Mitra; Priya Ranjan
Abstract: We construct a model of offshoring with externalities and firm heterogeneity. Due to the presence of externalities, temporary shocks like the Y2K problem can have permanent effects, i.e., they can permanently raise the extent of offshoring in an industry. Also, the initial advantage of a country as a potential host for outsourcing activities can create a lock in effect, whereby late movers have a comparative disadvantage. Furthermore, the existence of firm heterogeneity along with externalities can help explain the dynamic process of offshoring, where the most productive firms offshore first and the others follow later. Finally, we show the possibility of complementarity between two modes of offshoring: FDI and offshore outsourcing.
Keywords: offshoring; external economies; firm heterogeneity; Y2K crisis
JEL Codes: F1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Temporary shocks (Y2K) (E32) | Permanent increase in offshoring activities (F69) |
| Increased offshoring (F69) | Increased productivity for firms in the south (O49) |
| Firm productivity (D21) | Timing and likelihood of offshoring decisions (F23) |
| Presence of FDI (F23) | Facilitation of subsequent outsourcing by other firms (L24) |