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Outsourcing Versus FDI in Oligopoly Equilibrium. Dundee Discussion Papers in Economics No.215

Leahy, Dermot and Montagna, Catia (2008) Outsourcing Versus FDI in Oligopoly Equilibrium. Dundee Discussion Papers in Economics No.215. Discussion Paper. Department of Economic Studies, University of Dundee.

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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.

Item Type: Monograph (Discussion Paper)
Additional Information: We wish to thank participants at the SIRE Conference on Spatial Economics and Trade at University of Strathclyde for comments on an earlier version of this paper. Dermot Leahy acknowledges the support of the Science Foundation Ireland Research Frontiers Programme (grant MAT017). The usual disclaimer applies.
Keywords: Outsourcing; Foreign Direct Investment; Trade Liberalisation; Oligopoly;
Subjects: Social Sciences > Economics
Item ID: 2759
Depositing User: Dermot Leahy
Date Deposited: 06 Oct 2011 15:24
Publisher: Department of Economic Studies, University of Dundee
URI:

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