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Outsourcing versus FDI under Uncertainty

E. Kwan Choi

& Jai-Young Choi

Working paper

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E. Kwan Choi

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This paper investigates outsourcing and foreign direct investment (FDI) decisions in North-South trade under conditions of price and wage uncertainty. Given that the North is abundant in capital but scarce in labor and capital is imperfectly mobile between countries, outsourcing to an independent Southern firm is generally better than in-house production, but the FDI is the dominant policy. This finding is consistent with the rising foreign direct investment in China by Northern firms.