On Intra-firm Trade and Multinationals: Offshoring and Foreign Outsourcing in Manufacturing

Abstract

For advanced industrialized economies, the era of globalization has created key roles for both the foreign outsourcing of intermediate inputs and intra-firm trade.¹ Recent papers, including Feenstra and Hanson (1996) and Brainard (1997), have treated these subjects separately, but their interaction and possible intersection (namely, transnational intra-firm trade in intermediate inputs) have received little attention.² Low-cost foreign outsourcing has long attracted many firms, whether part of a multinational enterprise or acting as independent companies. Increasingly, however, organizational and other considerations have motivated firms to use imported inputs from affiliates abroad, instead of inputs from arm’s-length domestic manufacturers; this activity amounts to vertical integration across borders. This process of intra-firm offshoring seems to be particularly intense in the case of high-tech sectors. Indeed, one of the signal attributes of a manufactured high-tech product is the extensive nature of its value-chain, the number of intermediate products and services, and the global, fragmented, nature of the final output.³ Progress in transportation, communications and standardization has significantly increased the fragmented nature of production. The high-tech value-chain is now a multilateral, multinational production mosaic, involving many countries but often just one firm or a group of affiliated firms.