Economic Theory

, Volume 38, Issue 3, pp 517–532

Offshoring and product innovation


DOI: 10.1007/s00199-007-0322-8

Cite this article as:
Naghavi, A. & Ottaviano, G. Econ Theory (2009) 38: 517. doi:10.1007/s00199-007-0322-8


We propose an endogenous growth model with offshoring to investigate its effects on product innovation and growth in the country of origin. Offshoring is associated with reduced feedback from offshored plants to domestic labs as well as coordination problems between the offshored and domestic divisions of firms. Production and transport cost parameters affect the static decision to relocate plants but not R&D. Hence, offshoring may be chosen by firms when it damages the growth rate of their countries of origin. In particular, if offshoring reduces the feedback from plants to labs, it is likely to bring dynamic losses when the countries of origin are large, especially in sectors in which R&D is cheap and product differentiation is strong. It is also likely to slow growth in sectors in which contractual incompleteness gives a strong bargaining power to offshored divisions in intra-firm transactions.


Offshoring Innovation Incomplete contracts Growth Spillovers Trade 

JEL Classification

F23 F12 

Copyright information

© Springer-Verlag 2007

Authors and Affiliations

  1. 1.Dipartimento di Economia PoliticaUniversità di Modena e Reggio EmiliaModenaItaly
  2. 2.FEEM and CEPRUniversità di Bologna, DSEBolognaItaly

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