Working Paper: NBER ID: w11885
Authors: Robert C. Feenstra; Barbara J. Spencer
Abstract: We explore the relationship between proximity of buyers and sellers and the organizational form of outsourcing. Outsourcing can be "contractual" in which suppliers undertake specific investments or involve "generic" market transactions. Proximity expands the variety of products sourced through contracts abroad rather than at home, but the range of generic imports is unchanged. A higher-quality foreign workforce raises the variety of contractual trade, but at the expense of generics. We confirm these predictions using data for ordinary versus processing exports from Chinese provinces to destination markets and also the predictions of an extended model that allows for multinational production.
Keywords: outsourcing; proximity; contractual trade; generic trade; international trade
JEL Codes: F1; L24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| distance (R12) | buyer's outside option (D44) |
| buyer's outside option (D44) | contractual outsourcing (L24) |
| distance (R12) | contractual outsourcing (L24) |
| proximity to low-wage countries (F66) | contractual outsourcing (L24) |
| decrease in trade costs (F19) | contractual agreements (L14) |
| higher-quality foreign workforce (J68) | variety of contractual trade (L14) |
| higher-quality foreign workforce (J68) | generic imports (F10) |
| foreign-owned firms (F23) | sensitivity to distance (C49) |
| domestic firms (F23) | sensitivity to distance (C49) |