Financial Imperfection and Outsourcing Decision

The relation between productivity level and the mode of organi- zation remains on unsolved puzzle in international trade theory. As pointed out by Antràs and Helpman (2004), while some studies in- dicate that low productivity …rms 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 …nancial markets. If the enforcement level of the …nancial market in the South country is low, only low productivity …rms choose outsourcing in the South. On the other hand, if the enforcement level is su¢ ciently high in the South country, high productivity …rms choose outsourcing in the South and low productivity …rms choose integration in the North country. Thus, we demonstrate that the dierence in the empirical results of previous studies arises from the dierent degrees of …nancial imperfections in the host country. Furtheremore, we extend this model to a multi-country model.