Country Competition and U.S. Overseas Assembly

To examine the role of international competition in outsourcing production decisions, I study the decisions of producers who used the U.S. Overseas Assembly Program (OAP) to conduct assembly operations in developing countries. The evidence, which is based on U.S. OAP imports between 1991 to 2000, shows that production costs and corporate tax policies both shaped production decisions. While increases in own country costs reduced the size of a developing country’s OAP shipments, increases in competitor costs helped to increase a country’s shipments. The effects of competitor country cost changes were relatively large, as the analysis suggests that a ten percent increase in competing country costs would increase a country’s OAP outsourcing activities by 5.8 percent, while a ten percent increase in competitor country taxes would increase a country’s OAP exports by 1.6 percent. JEL Code: H1, F1, F2