Dundee Discussion Papers in Economics 215: Outsourcing versus FDI in oligopoly equilibrium

Dermot Leahy, Catia Montagna

    Research output: Working paperDiscussion paper

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    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.
    Original languageEnglish
    PublisherUniversity of Dundee
    Publication statusPublished - 2008

    Publication series

    NameDundee Discussion Papers in Economics
    PublisherUniversity of Dundee
    No.215
    ISSN (Print)1473-236X

    Keywords

    • Outsourcing
    • Foreign direct investment
    • Trade liberalisation
    • Oligopoly

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