Dynamic Aspects of Offshoring

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Technological advances over the past two decades have facilitated an international fragmentation of produc-tion. For many products, different slices of the value chain are now being produced offshore, in some cases production is spread out all around the globe. There is a large body of theoretical and empirical literature that tries to explain such offshoring and to identify its effects. Some authors suggest explanations following lines of comparative advantage, others pursue less standard lines of explanation. The overall message from this literature is that there are various channels through which offshoring might be gainful, but it also points out distributional implications, mainly from wage effects. The vast majority of contributions use static models that abstract from uncertainty. In this project we plan to contribute to this literature by taking a dynamic perspective on offshoring and by allowing for uncertainty when exploring explanations and effects of offshoring. Dynamic models allow us to distinguish between short-run and long-run consequences that derive from investments in research and development, physical capital, or education. Introducing uncertainty allows us to explain offshoring as a means to deal with shocks to, and volatility of, productivity or demand. While relatively obvious to the practitioner, these lines of explanation have so far received very scant attention in the theoretical literature. Clearly, considering dynamic relationships and uncertainty also gives rise to novel policy implications related to offshoring. Hence, the project is also intended to address potential reasons for policy intervention in the area of international trade and investment.