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Organizing Offshoring: Middle Managers and Communication Costs

Author

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  • Pol Antràs
  • Luis Garicano
  • Esteban Rossi-Hansberg

Abstract

Why do firms decide to offshore certain parts of their production process? What qualifies certain countries as particularly attractive locations to offshore? In this paper we address these questions with a theory of international production hierarchies in which organizations arise endogenously to make efficient use of agents' knowledge. Our theory highlights the role of host-country management skills (middle management) in bringing about the emergence of international offshoring. By shielding top management in the source country from routine problems faced by host country workers, the presence of middle managers improves the efficiency of the transmission of knowledge across countries. The model further delivers the prediction that the positive effect of middle skills on offshoring is weaker, the more advanced are communication technologies in the host country. We provide evidence consistent with this prediction.

Suggested Citation

  • Pol Antràs & Luis Garicano & Esteban Rossi-Hansberg, 2006. "Organizing Offshoring: Middle Managers and Communication Costs," NBER Working Papers 12196, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:12196
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    1. Robert E. Lipsey, 2001. "Foreign Direct Investment and the Operations of Multinational Firms: Concepts, History, and Data," NBER Working Papers 8665, National Bureau of Economic Research, Inc.
    2. Pol Antràs & Luis Garicano & Esteban Rossi-Hansberg, 2006. "Offshoring in a Knowledge Economy," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(1), pages 31-77.
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    5. Robert C. Feenstra, 1998. "Integration of Trade and Disintegration of Production in the Global Economy," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 31-50, Fall.
    6. Aitken, Brian & Harrison, Ann & DEC, 1994. "Do domestic firms benefit from foreign direct investment? Evidence from panel data," Policy Research Working Paper Series 1248, The World Bank.
    7. Pol Antràs, 2003. "Firms, Contracts, and Trade Structure," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(4), pages 1375-1418.
    8. Robert E. Lucas Jr., 1978. "On the Size Distribution of Business Firms," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 508-523, Autumn.
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    11. Luis Garicano, 2000. "Hierarchies and the Organization of Knowledge in Production," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 874-904, October.
    12. Luis Garicano & Esteban Rossi-Hansberg, 2006. "Organization and Inequality in a Knowledge Economy," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(4), pages 1383-1435.
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    Cited by:

    1. Liberti, José María & Seru, Amit & Vig, Vikrant, 2015. "Information, credit, and organization," IMFS Working Paper Series 97, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
    2. Basco, Sergi & Mestieri, Martí, 2013. "Heterogeneous trade costs and wage inequality: A model of two globalizations," Journal of International Economics, Elsevier, vol. 89(2), pages 393-406.
    3. Marin, Dalia, 2012. "The Theory of the Firm goes Global," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 370, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    4. Gray, Rowena & Montresor, Giulia & Wright, Greg C., 2020. "Processing immigration shocks: Firm responses on the innovation margin," Journal of International Economics, Elsevier, vol. 126(C).
    5. Rosario Crinò, 2009. "Offshoring, Multinationals And Labour Market: A Review Of The Empirical Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 23(2), pages 197-249, April.
    6. Baldwin, Richard & Robert-Nicoud, Frédéric, 2014. "Trade-in-goods and trade-in-tasks: An integrating framework," Journal of International Economics, Elsevier, vol. 92(1), pages 51-62.
    7. Lorenzo Caliendo & Esteban Rossi-Hansberg, 2012. "The Impact of Trade on Organization and Productivity," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 127(3), pages 1393-1467.
    8. Nicholas Bloom & Raffaella Sadun, 2012. "The Organization of Firms Across Countries," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 127(4), pages 1663-1705.
    9. Yanhui Wu, 2011. "Managerial Incentives and Compensation in a Global Market," CEP Discussion Papers dp1066, Centre for Economic Performance, LSE.
    10. Basco, Sergi & Mestieri, Marti, 2013. "Mergers along the Global Supply Chain: Information Technologies and Routineness," TSE Working Papers 13-428, Toulouse School of Economics (TSE), revised Nov 2013.
    11. Rosario Crinò, 2010. "Service Offshoring and White-Collar Employment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 77(2), pages 595-632.
    12. Ariel T. Burstein & Alexander Monge-Naranjo, 2009. "Foreign Know-How, Firm Control, and the Income of Developing Countries," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 124(1), pages 149-195.
    13. Seungrae Lee, 2016. "Post-production services and optimal integration strategies for the multinational firm," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 152(4), pages 597-628, November.
    14. Wolfgang Keller & Stephen Ross Yeaple, 2013. "The Gravity of Knowledge," American Economic Review, American Economic Association, vol. 103(4), pages 1414-1444, June.
    15. L. Kamran Bilir, 2011. "Patent Laws, Product Lifecycle Lengths, and the Global Sourcing Decisions of U.S. Multinationls," Discussion Papers 10-027, Stanford Institute for Economic Policy Research.
    16. Daniel Lederman & William F. Maloney, 2012. "Does What You Export Matter? In Search of Empirical Guidance for Industrial Policies," World Bank Publications - Books, The World Bank Group, number 9371.
    17. Zhou, Jun, 2012. "Cartel Duration and Endogenous Private Monitoring and Communication: An Instrumental Variables Approach," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 369, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    18. Kim, Se-Um, 2008. "The Technological Origins of the High School Movement," MPRA Paper 12087, University Library of Munich, Germany.
    19. Lei Wang & Thomas Stephen Ramsey, 2023. "Will falling domestic labor compensation share really be improved when global trade slowdown?," Palgrave Communications, Palgrave Macmillan, vol. 10(1), pages 1-12, December.

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    More about this item

    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • F1 - International Economics - - Trade
    • F2 - International Economics - - International Factor Movements and International Business
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

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