The Impact of Differential Falls in Offshoring Costs on Welfare

Abstract

We highlight the fact that offshoring firms and local firms that do not offshore coexist in the North. Adopting the O‐ring production function approach to offshoring, we demonstrate that a fall in offshoring costs in any sector makes the South better off and that if offshoring costs in a high‐technology sector fall at a faster rate, the North is worse off, and vice versa.

Supermodularity and Global Supply Chains without the South

“…For simplicity, we assume that tasks are symmetric in the CES function as in Grossman and Maggi (). However, as Dei () and Ngienthi and Dei () showed, if tasks are asymmetric in the O‐ring production function, then the South may be involved in global supply chains even if the production process is supermodular. Given that the South is hardly involved in the global supply chain for the Boeing 787, it is reasonable to assume here that tasks are symmetric.…”

“…The wage rate at the equilibrium may be a threshold wage rate such as or as in Ngienthi and Dei () or it may lie between threshold wage rates as in Dei ().…”

Offshoring Prompts High Quality Labour Markets

“…There are many published studies that focus on offshoring, including Feenstra and Hanson (1997), Jones (2000), Fujita and Thisse (2006), Anderson et al (2006), Grossman and Rossi-Hansberg (2008), Dei (2010), Ngienthi and Ma (2011), Ngienthi and Dei (2012) and Ngienthi et al (2013). Most of these papers examine how offshoring affects social welfare.…”

“…To answer this question, I develop a model of a small open economy to investigate how offshoring affects the quality of labour markets in the host country. To capture offshoring, I adopt the offshoring model of Dei () and Ngienthi and Dei (). I consider offshoring in two sectors: a low‐technology sector and a high‐technology sector.…”