Outsourcing, Tariffs Agreement, and Trade LiberalizationOutsourcing, Tariffs Agreement • February 22nd, 2008
This paper attempts to develop the theory of strategic outsourcing. It examines the strategic choices within the broader-defined outsourcing: FDI or intra-industry trade, and the effects of strategic tariff agreement and potential trade liberalization on such choices by modifying Chen, Ishikawa and Yu’s two-firm-two-country model (2003), which both domestic and foreign firms produce the homogenous intermediate good and compete in the domestic market for heterogeneous final goods, with our boarder definition of outsourcing including FDI and intra-industry trade. We find that for the intermediate good, the choice made by the multinational firm between FDI and intra-industry trade depends on the bargaining power on tariffs between both developing and developed countries. Since the developing country seems possess more bargaining power with its lower marginal cost of production, we find FDI, the other form of outsourcing, is more possible to be chosen by the multinational firm, while it in
