Title: Bi-Sourcing in the Global Economy
Reference Number: 1152
Publication Date: December 2005
JEL Classifcation: D23, F21, F23, L22, L23

Julan Du
Chinese University of Hong Kong

Yi Lu
Chinese University of Hong Kong

Zhigang Tao
The University of Hong Kong

In organizing production, many firms conduct bi-sourcing, i.e., acquiring the same set of inputs by both buying from external suppliers (outsourcing) and producing in componentmanufacturing subsidiries (insourcing). We show that, by adopting the bi-sourcing strategy, firms can use the in-house production to mitigate the holdup problem in outsourcing and introduce elements of competition from outsourcing in dealing with the incentive problem in insourcing (the cross-threat effect). When firms conduct bi-sourcing in the global economy consisting of high-waged North and low-waged South, they need to make the location choice for both insourcing and outsourcing. We find that the low wage in the South can stimulate investment incentive by component suppliers no matter whether they are internal or external suppliers (the cost difference effect). Furthermore, firms may achieve better cross-threat effect by locating overly strong (or weak) supplier in the disadvantageous North (or advantageous South) (the balancing effect). We demonstrate that locating both internal and external suppliers in the South often yields the highest production efficiency among all possible patterns of bi-sourcing. Our results on bi-sourcing patterns are consistent with some recent trends in world trade such as the growing vertical specialization, intrafirm trade and complementarity between foreign direct investments and trade.

Published in Journal of International Economics 77, April 2009, pp. 215-222.

Key words: Multinational firms, global sourcing, property-rights theory, vertical integration, outsourcing, bi-sourcing

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Last modified: 09/20/2010