Working Paper No. 02-08

Outsourcing Globally during the Product Life Cycle A Theory and Some Evidence
Galina An and Murat F. Iyigun
July 2002

ABSTRACT

We develop a theoretical framework where products go through a standard life cycle and product quality is driven by cumulative production experience. Production experience influences the nature of cross-country outsourcing activity, and hence, the contents of trade. Multinational enterprises outsource the production of relatively mature, standardized products to low-cost producers with relatively little production experience, and those of more recently developed and non-standard products to producers with relatively more experience. Using panel data covering 110 countries and the period between 1970 and 1997, we find that production experience does help to account for the variation in export content. Developing countries with initially high cumulative production experience produced and exported younger products, whereas those with less experience dealt with more mature products. Our results suggest that intra-industry trade, openness, and foreign direct investment also help to generate exports that are in the earlier stages of their life cycle. Interestingly, once the effect of experience is accounted for, the impact of educational attainment on the average product life cycle stage of exports is not robust.

JEL classification numbers: I20, J24, O11, O31, O40.
Keywords: learning-by-doing, human capital, intra-industry, trade.

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