A Specific-factor Model of Offshoring

This paper presents a specific factor model of a small open economy to show the factor price effect and welfare effect of offshoring. Different to ambiguous wage effect conclusions of offshoring under Heckscher-Ohlin framework, the conclusions of this paper is clear-cut. Offshoring will benefit specific factor (skilled labour and land), hurts some non-specific factor (unskilled labour), and enlarge the skilled and unskilled wage gap in home country. This conclusion is independent of factor intensity of offshoring fragment, complete or incomplete specialization at equilibrium and whether FDI is included. However, a welfare loss of home country after offshoring might be possible either with or without FDI because of the redistribution of incomes to different factor owners. If certain amount of unskilled labour is trained to update skills, changes of factor prices are depending on the pre-training equilibrium, international capital mobility and capital intensity of fragments.