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Outsourcing vs FDI in oligopoly equilibrium

Outsourcing vs FDI in oligopoly equilibrium

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Authors

  • Dermot Leahy
  • Catia Montagna

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Original languageEnglish
Pages149-166
Number of pages18
JournalSpatial Economic Analysis
Journal publication date2009
Journal number2
Volume4
DOIs
StatePublished

Abstract

We consider the make-or-buy decision of oligopolistic firms in an industry in which final good production requires specialised inputs. Factor price considerations dictate that firms acquire the intermediate abroad, by either producing it in a wholly owned subsidiary or outsourcing it to a supplier who must make a relationship specific investment. Firms’ internationalisation mode depends on cost and strategic considerations. Crucially, asymmetric equilibria emerge, with firms choosing different modes of internationalisation, even when they are ex-ante identical. With ex-ante asymmetries, lower cost producers have a stronger incentive to vertically integrate(FDI), while higher cost firms are more likely to outsource.

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