The evolving patterns of global production of multi-product firms

We extend the framework of Antràs and Helpman (2004) to investigate how multi-product firms choose different production structures for producing various products and derive four equilibrium patterns of global production. We show that the evolving patterns of inward foreign direct investment and outward processing trade observed in China can be explained by the rapid increase in labour productivity relative to wages. The model predicts that, as labour productivity increases, outsourcing activities will eventually exhibit an inverse U-shape. We also find that technology spillover increases outsourcing but reduces FDI; the increase in labour productivity, however, could raise both FDI and outsourcing activities.