Trade Policy and Firm Boundaries

ULB -- Universite Libre de Bruxelles, Working Papers ECARES 01/2010;
Source: RePEc


We develop an endogenous growth model with R&D spillovers to study the long-run consequences of offshoring with firm heterogeneity and incomplete contracts. In so doing, we model offshoring as the geographical fragmentation of a firm's production chain between a home upstream division and a foreign downstream division. While there is always a positive correlation between upstream bargaining weight and offshoring activities, there is an inverted U-shaped relationship between these and growth. Whether offshoring with incomplete contracts also increases consumption depends on firm heterogeneity. As for welfare, whereas with complete contracts an R&D subsidy is enough to solve the inefficiency due to R&D spillovers, with incomplete contracts a production subsidy is also needed. Copyright © The editors of the "Scandinavian Journal of Economics" 2009 .

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    ABSTRACT: Corresponding author: Emanuel Ornelas, Managerial Economics and Strategy Group, London School of Economics, Houghton Street, London WC2A 2AE, UK. E-mail: We thank Kyle Bagwell, Paola Conconi, Luis Garicano, Alberto Trejos and especially Bob Staiger and two anonymous referees for comments and suggestions. We also thank seminar participants at ECARES, Erasmus University, Norwegian School of Economics, Tübingen, Nottingham, the 2008 CEP Annual Conference, the 2008 ELSNIT Conference and the 2008 Conference on Trade and Institutions at Seoul National University for their comments. Nathan Converse provided helpful research assistance. Ornelas gratefully acknowledges support from the SCIFI-GLOW project.
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