Summary
Summary FDI Material Week 5 - VFDI & Outsourcing/offshoring
- Course
- Institution
Lecture 5, Corcos et al. (2013), and Fort (2017)
[Show more]
Seller
Follow
franciscobotero
Reviews received
Content preview
Lecture 5October 11, 2022 10:56 AM
Title: VFDI & Outsourcing/offshoring
WI the motivation for • Vertical FDI: produce elsewhere because of cheaper production costs
VFDI?
WI the short-coming • Melitz assumes that firms differ in productivity… Helpman et al. extended the model by
of HMY? including HFDI as the only alternative international option.
• Challenges:
○ What about trade in intermediate outputs (outsourcing)?
▪ Paper 1 (Corcos et al. 2013) focuses on ownership (should a firm…):
□ Offshore?
Outsource foreign (buying from another firm abroad)
Vertical FDI (owning a subsidiary abroad)
○ Paper 2 focuses on the role of technology in outsourcing/offshoring
• Bottomline of this week's papers:
• Corcos et al (2013) on the intra-firm imports by French firms: vertical FDI (vs
arm’s length imports)
○ Foreign outsourcing vs VFDI depends on:
Acc. Corcos et al. WD
the decision of a ▪ The firm's:
firm to do VFDI □ factor intensity
depend on? (3 things) □ Productivity
▪ Host country's: institutions
• Fort (2017) on role of technology in production fragmentation (= domestic
Acc. Fort, how does outsourcing or offshoring):
technology mediate
fragmentation of a ○ Firms with more technology are more likely to fragment.
firm? ▪ The effect of technology depends on the industry:
WD the industry □ Industries with more codifiability have higher fragmentation.
influence this? Technology lowers coordination costs, but more for
domestic outsourcing than for foreign.
WI the relationship ▪ There are complementarities between technology and worker skills.
between human capital □ Firms that are more technology intensive are more likely to
and technology? outsource to high skilled countries (SBTC).
Intro to 1st paper
• Simple textbook case: VFDI is efficiency seeking (or resource seeking)
WI the main reason to
do VFDI? • Efficiency seeking: lower wages in China make it profitable to produce there:
○ “slicing up the value chain” or international fragmentation of production
process
Is VFDI a substitute
or a complement of ○ VFDI assumes that trade and offshoring are complements (as it focuses on
trade? intermediate inputs)
• Types of fragmentation:
• Domestic: outsource domestically (NOT DISCUSSED BY THIS PAPER, ONLY BY
FORT (2017))
• Foreign (Offshoring): discussed by Corcos et al.
WR the two types of • Foreign outsourcing: subcontracting and importing.
fragmentation in ▪ This paper calls it arm-lengths trade
Corcos et al.?
• Vertical FDI: owned subsidiary.
▪ This paper calls it intrafirm trade
FDI Page 53
, •
• Production function of offshoring: The MC that matters includes transport costs
Graph production
function of exports (importing the foreign production) because the inputs are either:
vs VFDI… a. subcontracted (arm-length imports)
(graph price*output, b. produced by owned plant abroad (intrafirm imports or VFDI)
incl.: D, AC, MC, MR,
t as VC, profits)
WD both production
functions include?
Why?
•
• Corcos et al.'s samples the imports by French firms in these 2 sourcing modes (a + b).
They want to find what determines the firm's choice.
WR the 4 empirical
predictions of • 4 key predictions of determining factors (VFDI):
determinants for FDI? 1. Input intensity (+): Capital- and skill-intensive firms are more likely to
engage in intrafirm trade (=VDFI).
2. Productivity (+): More productive firms are more likely to engage in
intrafirm trade.
3. Capital stock in host-country (+): Intrafirm imports are more likely to
originate from capital-abundant countries.
4. Quality of institutions (+): More productive firms are more likely to import
intrafirm from countries with good contract enforcement
W motivates these • Motivation of predictions:
predictions? • Hold-up problem: the risk of incompleteness of contracts (trust, property
rights, timeliness) and relation-specific investments motivate VFDI.
WI the hold-up ▪ Problem: Risk of hold-up after production stage (ex-post) leads to
problem? underinvestment (ex-ante)
▪ Solution: VFDI gives more control over production (HQ in France
HD VFDI solve it?
decides) via ownership (property rights approach).
▪ Comes from International Economics.
WR the 2 alternative • OLI (Ownership, Location and Internationalization) paradigm.
approaches to study
firms' int'l ▪ Comes from International Business.
strategy? (IB vs IE) • VFDI demands higher investments, so only more productive firms (more
profitable) should choose VFDI over foreign outsourcing because they want
Y would more
productive firms do to have higher degree of control.
VFDI?
• Preliminary evidence:
• Key dependent variable is 1 if firm imports product from country
via foreign affliate (=VDFI!) and 0 otherwise.
• Having a foreign affiliate , as opposed to foreign outsourcing, is
positively correlated with
WR the main findings ▪
of the paper about ▪
determinants of FDI?
(3-4 determinants) ▪
• The distribution of firms' triple ( ) suggests a link with firm's
productivity…
FDI Page 54
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller franciscobotero. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $4.01. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
76669 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now