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On the choice of in-house production versus outsourcing by multinationals

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  • C. Alyson

Abstract

The global economy is becoming more integrated with the increase in international fragmentation. This paper examines two forms of global production networks in a general equilibrium framework by building on the 'knowledge-capital model.' The focus is the relationship between country characteristics and the multinational firm's choice either to allocate the labor-intensive processing stage in-house to its foreign affiliates or to outsource the activity to outside contractors at arm's-length. Chinese data on the export processing trade are used to test the theory. The findings show that multinational firms with their headquarters in highly skilled-labor-abundant countries of intermediate size have a preference for outsourcing. By contrast, skilled-labor-abundant countries of small size are homes to multinational firms with subsidiary production in the host country where unskilled labor is cheap.

Suggested Citation

  • C. Alyson, 2006. "On the choice of in-house production versus outsourcing by multinationals," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 15(2), pages 231-254.
    • Handle: RePEc:taf:jitecd:v:15:y:2006:i:2:p:231-254
    DOI: 10.1080/09638190600691000
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    References listed on IDEAS

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