Empirical Evaluation of Foreign Outsourcing Decisions and Trends in Vertical Specialization

National Bureau Of Economic Research Inc, Cambridge MA

Investigators

Abstract

One of the most notable trends in international trade is the growth of vertical specialization. Thanks to reduced costs of international communications and transportation, firms have increasingly fragmented their production into multiple stages. Such production means that a single final good may be worked on in many countries, as each sequential production stage is performed in the location that is most advantageous for the process. By studying two U.S. programs that facilitate foreign outsourcing operations- the 9802 tariff provisions in the Harmonized Tariff Schedule of the United States and the U.S. Foreign Trade Zones Program- this research project deepens our understanding of trends in vertical specialization and the responses of foreign outsourcing to changes in country and industry conditions. To evaluate the effects of country costs on outsourcing decisions, this project studies three questions. The first component of the project studies how outsourcing is allocated across countries. In examining this topic, it is important to identify which countries are regarded as competitors. In contrast with previous work that has assumed that all countries are in competition with all others, this analysis will examine whether factors such as geography, education, income, or other national characteristics place countries in competition with each other. The second part of this project examines whether foreign investment plays a special role in mediating firm production sharing decisions. Such a role may be expected, as foreign investment provides a physical infrastructure of manufacturing sites that are tailored to foreign assembly. In addition, foreign investments may influence sourcing decisions, as foreign investment provides a conduit for information about country characteristics. The third component of the project studies how firms decide whether to deploy resources, either keeping production at home or moving it abroad.