lecture 12 offshoring

what is horizontal offshoring

it is when exporting is costly, so replicating the production process in the foreign market may be profit maxing and avoid transports costs

what is vertical offshoring

when producer may find it more optimal to fragment production in different countries in presence of factor price differences

what consists of horizontal FDI

• costs consists of additional fixed costs from creating a new plant

• firms get to sell w/out trade costs which lead to lower variable costs

• more horizontal FDI occur when trade costs are higher and building foreign plants cheaper

• horizontal FDI and trade are substitutes

what consists of vertical FDI

• firm tries to decide how to produce final good at a low average cost

• production process consists of intensive skilled/ unskilled labor that can be concentrated in one building

• able to focus certain production processes in different countries

• able to exploit cross country differences in factor prices

• should be decreasing transportation costs and increasing factor endowments

• trade and vertical FDI are complements

what is internalization

it is when firms decide on where to locate different stages of production and the extent of control to exert over each other… it is crucial for multinational enterprises

what are the reasons to internalize production

costly tech transfer

• transfer of knowledge may by easier/ safer within a single organization than through market transaction

• patent/ property rights may be weak or non existent

contracting problems

• limitations to free exchange of goods/ services between independent agents due to enforcement or observation

• intra firms may avoid contractual differences

• integration may affect relative bargining power/ incentive of producers and suppliers in product enhancing way

when are firms more likely to vertically intergrate

• when there are higher tech and more complex production requirements

• lower enforcement

• fewer outside options for suppliers/ firms

• when products are very customized and research intensive

lec 13: what can explain the skill upgrading within industries we see in the data

skill biased technical change