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Offshoring and product innovation
Authors:Alireza Naghavi  Gianmarco Ottaviano
Affiliation:(1) Dipartimento di Economia Politica, Università di Modena e Reggio Emilia, Viale Berengario 51, 41100 Modena, Italy;(2) FEEM and CEPR, Università di Bologna, DSE, Piazza Scaravilli 2, 40125 Bologna, Italy
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. We thank Thierry Verdier, an anonymous referee and participants to the Final Conference of the EU funded Research Training Network “Trade, Industrialisation and Development”, held at Paris Jourdan Sciences Economiques on 26–27 October 2006, for helpful comments. The second author gratefully acknowledges financial support from MIUR.
Keywords:Offshoring  Innovation  Incomplete contracts  Growth  Spillovers  Trade
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