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Working Paper No. 04-16

International Outsourcing through Foreign Direct Investment and Intellectual Property Protection
Yuan (Leda) Zhuang
September 2004


This paper studies international outsourcing through Foreign Direct Investment (FDI) by Multinational Enterprise (MNE). Outsourcing process is decomposed to two steps-choosing production location and shipping products back to home country. Outsourcing is measured as the ratio of affiliate sales over US parent sales. Based on cost comparison, Factors that affect production cost and factors that affect trade cost both matter. Improved Intellectual Property Protection (IPP) increases outsourcing by reducing the effective cost of skilled labor and by strengthening the impact of R&D. Bilateral data between US and other countries are used for empirical test. Least Squares (LS) regression is applied to positive outsourcing observations and the zero-outsourcing observations are added in the Tobit regression. IPP is significant in LS specifications but not in Tobit specifications. When the outsourced countries are divided into developed countries (DC's) and less developed countries (LDC's). IPP is only significant for the DC's. Possible reasons for different IPP effects are discussed. Industries also have different effects on outsourcing.

JEL classification: F1; F2; J3
Keywords: outsourcing, Intellectual Property Protection (IPP), technology intensity skilled labor, unskilled labor