F33FYRJ6XGLTXN8Y.pdf - Journal of Economic Integration 17(4 December 2002 687-709 International Outsourcing in a Two-Sector Heckscher-Ohlin Model

F33FYRJ6XGLTXN8Y.pdf - Journal of Economic Integration 17(4...

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Journal of Economic Integration 17(4), December 2002; 687-709 International Outsourcing in a Two-Sector Heckscher-Ohlin Model Hartmut Egger University of Zurich Abstract This paper analyzes the distributional effects of international outsourcing in a two sector Heckscher-Ohlin type model if both sectors get economical access to cost-saving international outsourcing. Thereby, it is shown that if both sectors are engaged in international outsourcing in equilibrium, the cost-saving effects of outsourcing as well as the factor contents of the outsourced fragments are relevant for the factor price effects. Concerning the Pareto-criterion the main finding is that a Pareto-improving factor price impact of international outsourcing cannot be excluded from a theoretical point of view. • JEL Classification: F14, F15, F16, F40 • Key Words: International Outsourcing General Equilibrium Analysis Distributional Effects Welfare Effects I. Introduction In the public and political discussion of industrialized economies opponents of globalization typically argue that globalization increases inequality. The fear is that firms try to exploit international factor price differences across economies by outsourcing (low-skilled) labor intensive parts of the value added chain to foreign. The conclusion is that a substitution of expensive home-supplied (low-skilled) labor by cheap foreign factors improves the income of capital owners at the cost of (low-skilled) labor. In contrast, proponents of globalization argue that the gains from the more efficient allocation of resources are so large that winners could fully *Corresponding address: Hartmut Egger, University of Zurich, Department of Economics, Ramistrasse 62, CH-8001 Zurich, Switzerland. Tel: +41-1-63-42303, E-mail: [email protected] 2002-Center for International Economics, Sejong Institution, All Rights Reserved.
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688 Hartmut Egger compensate losers. In the last decade the question of the distributional effects of international outsourcing has also reached the scientific discussion of economists. Jones (2000) and Jones and Kierzkowski (1990, 2001) have argued that technological changes have decreased the costs for service links required for coordination and com- munication activities, implying an intensified fragmentation of production processes. In particular, they stress that besides tariffs and legal non-tariff barriers such technological changes may account for the observed increase in international specialization. 1 However, starting with Krugman (1995) international outsourcing is nowadays debated as alternative candidate to skill-biased technological change for explaining the increasing wage gap observed in the United States. Compare Feenstra and Hanson (1996a, 1996b) and Slaughter (2000) for empirical assessments. Using a wide measure of outsourcing including “all imported intermediate and final goods that are used of, or sold under the brandname of, an American firm” (p. 107) Feenstra and Hanson estimate a significant and large effect of the increase in inter- national outsourcing on the U.S. wage differential in favor of high-skilled workers.
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