To Outsource or not to Outsource in North-South Trade

This paper investigates outsourcing and foreign direct investment (FDI) decisions based on factor price differentials in North-South trade when the production is fragmented into two independent processes. It is shown that (a) when the Southern firm does not have the Northern firm-specific technology for a fragmentable process and capital is imperfectly (perfectly) mobile between countries, the Northern firm produces the final product by outsourcing the other fragmentable process from the South via FDI (either FDI or outsourcing to a Southern outsourcee); (b) when the Southern firm acquires the Northern firm-specific technology for the fragmentable process and capital is imperfectly (perfectly) mobile, only the Northern firm produces the final product by outsourcing the other process via FDI and drives out the Southern firm from the world market (both the Northern and Southern firms produce the final product); (c) in all the cases, outsourcing is unidirectional from the North to the South