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Outsourcing versus FDI in oligopoly equilibrium
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Outsourcing versus FDI in oligopoly equilibrium

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  • Leahy, Dermot
  • Montagna, Catia

Abstract

We consider the make-or-buy decision of oligopolistic firms in an industry in which final good production requires specialised inputs. Factor price considerations dictate that firms acquire the intermediate abroad, by either producing it in a wholly owned subsidiary or outsourcing it to a supplier who must make a relationship specific investment. Firms internationalisation mode depends on cost and strategic considerations. Crucially, asymmetric equilibria emerge, with firms choosing different modes of internationalisation, even when they are ex-ante identical. With ex-ante asymmetries, lower cost producers have a stronger incentive to vertically integrate (FDI), while higher cost firms are more likely to outsource.

Suggested Citation

  • Leahy, Dermot & Montagna, Catia, 2008. "Outsourcing versus FDI in oligopoly equilibrium," SIRE Discussion Papers 2008-39, Scottish Institute for Research in Economics (SIRE).
    • Handle: RePEc:edn:sirdps:52
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    References listed on IDEAS

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    1. Dermot Leahy & Catia Montagna, 2006. "'Make-or-Buy' in International Oligopoly and the Role of Competitive Pressure," Dundee Discussion Papers in Economics 197, Economic Studies, University of Dundee.
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    More about this item

    Keywords

    Outsourcing; Foreign Direct Investment; Trade Liberalisation; Oligopoly;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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