Publication: Vertical Foreign Direct Investment versus Outsourcing: A Welfare Comparison from the Perspective of a Host Country
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Published
2011
ISSN
13636669
Date
2012-03-30
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In the offshoring literature, there is a huge disconnect between the alternative modes of organizing offshore production and their relative welfare impact on a host country. We bridge this gap by comparing the welfare of a host country from vertical foreign direct investment (VFDI) vis-a-vis international outsourcing. Our model finds that the ability to maximize welfare in the alternative modes of organizing offshore production is contingent on the absorptive capacity of the host country. If a host country's absorptive capacity is above a critical threshold, outsourcing is more welfare enhancing vis-a-vis VFDI; while even with an absorptive capacity lower than this critical threshold, outsourcing being welfare improving over VFDI cannot be ruled out.
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Publication Vertical FDI versus Outsourcing : The Role of Host Country Human Capital(Taylor and Francis, 2011-06-12)The existing literature on offshoring neglects the importance of host country conditions in affecting the boundaries of a firm. In this paper, we focus on the role of the host country's human capital in affecting the organization of offshore production. Acknowledging that an input is produced offshore only after training the host labor, we propose that this training cost depends on the human capital gap between the home and the host country. Our model finds that a sourcing firm prefers to offshore production internationally only if the human capital gap between the home and the host country is below a threshold. Secondly, as the human capital gap increases, the probability for international outsourcing vis-Ã -vis intra-firm trade increases. 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The main factors leading to this conclusion are South Asia's current low levels of foreign direct investment, the many unexploited opportunities for embodied knowledge transfer, and supply-chain linkages. The overall lessons for developing countries are that liberalizing policy constraints in both trade and foreign investment, keeping corporate tax rates modest, and improving governance and transparency could help to substantially improve foreign direct investment flows.Publication Trade, Foreign Direct Investment, and International Technology Transfer : A Survey(World Bank, 2002-09-01)What role does trade play in international technology transfer? Do technologies introduced by multinational firms diffuse to local firms? What kinds of policies have proved successful in encouraging technology absorption from abroad and why? Using these questions as motivation, this article surveys the recent trade literature on international technology transfer, paying particular attention to the role of foreign direct investment. The literature argues that trade necessarily encourages growth only if knowledge spillovers are international in scope. Empirical evidence on the scope of knowledge spillovers (national versus international) is ambiguous. Several recent empirical plant-level studies have questioned earlier studies that argued that foreign direct investment has a positive impact on the productivity of local firms. Yet at the aggregate level, evidence supports the view that foreign direct investment has a positive effect on economic growth in the host country.
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