A North–South model of outsourcing and growth

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  • Yuki Saito
    Graduate School of Economics Osaka University 1‐7 Machikaneyama Toyonaka Osaka 560‐0043 Japan

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<jats:title>Abstract</jats:title><jats:p>In this paper, I formulate a simple North–South R&D‐based growth model where final goods firms in the North endogenously determine the range of international outsourcing of intermediate goods to the South. I show that a fall in the trade cost (through trade liberalization) of intermediate goods in the North: (i) reduces the wage of the North relative to that of the South; (ii) increases the outsourced variety of intermediate goods in the North; and (iii) stimulates Northern R&D activity and economic growth in both countries. By conducting welfare analysis, I also show that a decline in the trade cost of intermediate goods in the North improves welfare in the South more than in the North.</jats:p>

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