GEP Research Paper 08/45
International Outsourcing and Welfare Reduction: an Entry-deterrence Story
Arijit Mukherjee and Yingyi Tsai
Summary
We show that international outsourcing may reduce welfare of the outsourcing country by deterring market-entry, thus showing a new effect which is different from the employment and the quality effects creating negative impacts of outsourcing. Entry deterrence under outsourcing reduces domestic welfare if both the profit extraction and cost saving from outsourcing are sufficiently small.
Abstract
We show that international outsourcing may reduce welfare of the outsourcing country by deterring market-entry, thus showing a new effect which is different from the employment and the quality effects creating negative impacts of outsourcing. Entry deterrence under outsourcing reduces domestic welfare if both the profit extraction and cost saving from outsourcing are sufficiently small.
JEL classification: F12, F21, F23, L12, L13, L24
Keywords: Entry, Outsourcing, Welfare
Issued in December 2008
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