Foreign direct investment; spill-overs; Oligopoly; Dynamic optimization
Abstract :
[en] In this paper we present a dynamic model of a firm which is deciding whether to outsource
parts of its production to a less developed economy where wages and the level of technology
are lower. Outsourcing reduces production costs but is associated with spillovers to foreign
potential competitors. Spillovers over time increase productivity of firms in the foreign
country and make them stronger competitors on the common market. The paper analyzes
the inter-temporally optimal behavior of the firm and shows that two outcomes are possible
in the long-run. One outcome is that there is one steady state where the firm invests a
positive amount in the foreign country and the other outcome is a continuum of steady
states with no investment. The paper then derives conditions such that it is optimal for the
firm to invest in the foreign country and characterizes different types of optimal dynamic
investment patterns. In addition, using numerical dynamic optimization methods, the effect
of the speed of technology adoption and of the wage differential on total labor income in the
home country is studied taking into account the transition dynamics.
Disciplines :
Economic systems & public economics
Author, co-author :
Dawid, Herbert; Bielefeld University, Germany > Department of Business Administration and Economics
Greiner, Alfred; Bielefeld University, Germany > Department of Business Administration and Economics
Zou, Benteng ; University of Luxembourg > Faculty of Law, Economics and Finance (FDEF) > Center for Research in Economic Analysis (CREA)
Language :
English
Title :
Foreign direct investment under international competition : Control of Spillover ?
