On Intra-firm Trade and Multinationals: Offshoring and Foreign Outsourcing in Manufacturing

For advanced industrialized economies, the era of globalization has created key roles for both the foreign outsourcing of intermediate inputs and intra-firm trade.1 Recent papers, including Feenstra and Hanson (1996) and Brainard (1997), have treated these subjects separately, but their interaction and possible intersection (namely, transnational intra-firm trade in intermediate inputs) have received little attention.2 Low-cost foreign outsourcing has long attracted many firms, whether part of a multinational enterprise or acting as independent companies. Increasingly, however, organizational and other considerations have motivated firms to use imported inputs from affiliates abroad, instead of inputs from arm’s-length domestic manufacturers; this activity amounts to vertical integration across borders. This process of intra-firm offshoring seems to be particularly intense in the case of high-tech sectors. Indeed, one of the signal attributes of a manufactured high-tech product is the extensive nature of its value-chain, the number of intermediate products and services, and the global, fragmented, nature of the final output.3 Progress in transportation, communications and standardization has significantly increased the fragmented nature of production. The high-tech value-chain is now a multilateral, multinational production mosaic, involving many countries but often just one firm or a group of affiliated firms.