Foreign Sourcing and Technology Transfer under Asymmetric Information

Although outsourcing vs. vertical integration is generally treated as a binary choice in international trade literature, firm-level data reveal that inputs can be imported both within and across firms' boundaries, even within narrowly defined industries from the same host country. This paper outlines a model of foreign sourcing which accommodates this practice (defined as mixed-sourcing) based on information asymmetries between a firm and suppliers on both (i) the firm's cost in transmitting knowledge across borders; and (ii) the supplier's productivity in using this know-how to customize input provision. Supply relationships establish that the firm gives an ownership share to its foreign supplier. The paper explores under what conditions the firm engages in multiple relations with suppliers of different types (high and low productive ones) based on differentiated ownership shares, thus compatible with the evidence of mixed-sourcing.