Internal and external gains from international outsourcing

This article examines the implications of international outsourcing in the Heckscher-Ohlin model of general equilibrium by explicitly expounding the external effects to the outsourcing firms. With its focus paced on the labor-augmenting effect of outsourcing, it shows that (a) the standard result of welfare-enhancing outsourcing always holds in the absence of external effects, and (b) in the presence of external effects, however, (i) outsourcing may be welfare-reducing for the outsourcing country; (ii) the effects of outsourcing on sectoral outputs, employment and factor prices depend on factor-intensity ranking, and the signs and the relative magnitudes of the sectoral returns to scale.