Strategic International Outsourcing

In the context of a simple model of strategic international bisourcing, we investigate the reasons why firms may simultaneously insource and internationally outsource. We also explore the impacts of international outsourcing on the production pattern of finished goods, tradable fragment prices, and welfare. The policy implications of attempts to restrict outsourcing are also established. We show that an outsourcing equilibrium may exist in the absence of any source of comparative advantage in fragments, that outsourcing is welfare improving if the costs of outsourcing are sufficiently small, and that attempts (by both countries) to prevent outsourcing may paradoxically lower employment and decrease the price of outsourced fragments. JEL: F1