The Nature of Outsourcing Relationships: Evidence from OAP Prices

By Swenson, Deborah L. | Economic Inquiry, January 2013 | Go to article overview

The Nature of Outsourcing Relationships: Evidence from OAP Prices


Swenson, Deborah L., Economic Inquiry


I. INTRODUCTION

The dramatic growth in international outsourcing has fueled the expansion of international trade and deepened international integration. (1) Developments in outsourcing attract public attention due to concern that improvements in information technologies enable companies to relocate production or assembly activities to lower-cost overseas locations. (2) However, while international outsourcing allows firms to take advantage of factor price differences, Grossman and Helpman (2005) demonstrate that country cost differences are not sufficient by themselves to guarantee outsourcing, as international outsourcing decisions are based on many factors including the costs of search and customization.

More generally, new research in international trade recognizes information as a key element in the globalization process. However, informational improvements, such as reduced communication costs or increasingly sophisticated bar code transmission and management tools may not affect all producers uniformly. As Ranch and Trindade (2003) show, product differentiation in consumption or production, when combined with informational uncertainty, produces a degree of "natural protection." For this reason, information technology improvements are likely to deliver the greatest increases in global integration for those markets where the matching of differentiated partners is critical to the formation of new international partnerships. Similarly, as noted by Antras (2003) and Bernard et al. (2010), the organization of a firm's global operations depends further on factors including the importance of headquarters investments and the degree of product contractibility. (3)

A key goal of this paper is to study whether outsourcing decisions are consistent with outsourcing models that feature search and adaptation costs. To this end, this paper studies U.S. outsourcing conducted under the auspices of the overseas assembly program, or OAP. The OAP program was designed to allow firms to avoid tariffs on U.S.-origin inputs that they utilized in final goods they assembled overseas. Thus, while the OAP does not include all U.S. outsourcing activities--it does not capture U.S. assembly of foreign parts, or overseas contract manufacturing that is based on U.S. designs and specifications--OAP imports provide insight into a wide swath of U.S. outsourcing and represented 8.5% of U.S. import value during the sample period. Since the OAP provides tariff benefits to manufacturers who use U.S. inputs in their overseas production, it is administered by U.S. customs. Consequently, while the OAP provides insights into manufacturing outsourcing decisions, it does not provide information on developments in services outsourcing.

Since OAP exempts U.S. inputs from tariffs, the program requires participating firms to provide detailed information on the U.S. and foreign content of their outsourcing imports. Thus, OAP data records facilitate the precise measurement of cost shocks and trade frictions at the country-product level. In particular, heterogeneity in input choices both across countries and products can be exploited to identify cost pass-through and general price responses for outsourcing imports. For example, year-by-year pass-through can be estimated by regressing yearly OAP price changes at the product-country level on product-country cost changes. Plots of the year-by-year coefficients in Figure 1 show that the raw rate of OAP pass-through ranged from 6% to 23%. (4) However, accurate outsourcing pass-through estimation requires a theory-based estimation framework that controls for economic factors that also influence price decisions.

This paper adopts Feenstra's (1989) passthrough model, which is modified to account for the cost structure and tariff treatment facing outsourcing firms who produced products for import under the OAP. This framework, which is based on a Bertrand model of competition in internationally differentiated goods, focuses its attention on cost pass-through and on the degree to which producers emulate the price changes of their competitors. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

The Nature of Outsourcing Relationships: Evidence from OAP Prices
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Author Advanced search

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.