The relation between productivity level and the mode
of organi- zation remains on unsolved puzzle in international
trade theory. As pointed out by Antras and Helpman (2004),
while some studies in- dicate that low productivity firms choose
to outsource, other studies have derived results to the contrary.
This paper attempts to solve the puzzle by taking into account the
imperfections of financial markets. If the enforcement level of
the financial market in the South country is low, only low
productivity firms choose outsourcing in the South.
On the other hand, if the enforcement level is sufficiently high
in the South country, high productivity firms choose
outsourcing in the South and low productivity firms choose
integration in the North country. Thus, we demonstrate that
the difference in the empirical results of previous studies arises
from the different degrees of financial imperfections in the host
country. Furtheremore, we extend this model to a multi-country model.
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