Outsourcing vs FDI in oligopoly equilibrium

TY - JOUR

T1 - Outsourcing vs FDI in oligopoly equilibrium

A1 - Leahy,Dermot

A1 - Montagna,Catia

AU - Leahy,Dermot

AU - Montagna,Catia

PY - 2009

Y1 - 2009

N2 - 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.

AB - 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.

KW - Outsourcing

KW - Foreign direct investment

KW - Trade liberalisation

KW - Oligopoly

U2 - 10.1080/17421770902833964

DO - 10.1080/17421770902833964

M1 - Article

JO - Spatial Economic Analysis

JF - Spatial Economic Analysis

SN - 1742-1772

IS - 2

VL - 4

SP - 149

EP - 166

ER -