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- Title
Offshoring and product innovation.
- Authors
Naghavi, Alireza; Ottaviano, Gianmarco
- Abstract
We propose an endogenous growth model with offshoring to investigate its effects on product innovation and growth in the country of origin. Offshoring is associated with reduced feedback from offshored plants to domestic labs as well as coordination problems between the offshored and domestic divisions of firms. Production and transport cost parameters affect the static decision to relocate plants but not R&D. Hence, offshoring may be chosen by firms when it damages the growth rate of their countries of origin. In particular, if offshoring reduces the feedback from plants to labs, it is likely to bring dynamic losses when the countries of origin are large, especially in sectors in which R&D is cheap and product differentiation is strong. It is also likely to slow growth in sectors in which contractual incompleteness gives a strong bargaining power to offshored divisions in intra-firm transactions.
- Subjects
OFFSHORE outsourcing; FREE trade; ECONOMIC models; RESEARCH &; development; INNOVATIONS in business; INCOMPLETE contracts
- Publication
Economic Theory, 2009, Vol 38, Issue 3, p517
- ISSN
0938-2259
- Publication type
Article
- DOI
10.1007/s00199-007-0322-8