Ossa, Ralph (2007) Trade liberalization, outsourcing, and firm productivity. CEPDP, 814. Centre for Economic Performance, London School of Economics and Political Science, London, UK. ISBN 9780853280408
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Empirical evidence suggests that trade liberalization increases firm productivity. This paper offers a novel explanation for this finding. I develop a simple general equilibrium model of trade in which trade liberalization leads to outsourcing as firms focus on their core competencies in response to tougher competition. Since firms are the better at performing tasks the closer they are to their core competencies, this outsourcing increases firm productivity. Moreover, I also investigate the links between various technological parameters and outsourcing. In particular, I analyze how technological progress, changes in fixed costs, and changes in internal governance costs affect firms’ integration decisions.
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