TY - JOUR
T1 - Outsourcing vs FDI in oligopoly equilibrium
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
M3 - Article
SN - 1742-1772
VL - 4
SP - 149
EP - 166
JO - Spatial Economic Analysis
JF - Spatial Economic Analysis
IS - 2
ER -