Trading Tasks: A Simple Theory of Offshoring

The nature of international trade is changing. For centuries, trade mostly entailed an exchange of goods. Now it increasingly involves bits of value being added in many different locations, or what might be called trade in tasks. Revolutionary advances in transportation and communications technology have weakened the link between labor specialization and geographic concentration, making it increasingly viable to separate tasks in time and space. When instructions can be delivered instantaneously, components and unfinished goods can be moved quickly and cheaply, and the output of many tasks can be conveyed electronically, firms can take advantage of factor cost disparities in different countries without sacrificing the gains from specialization. The result has been a boom in “offshoring” of both manufacturing tasks and other business functions. In this paper, we develop a simple and tractable model of offshoring based on the tradeable tasks. We conceptualize production in terms of the many tasks that must be performed by each factor of production. A firm can perform each of the continuum of tasks required for the realization of its product either in close proximity to its headquarters or at an offshore location. Offshoring may be attractive, if some factors can be hired more cheaply abroad than at home, but it also is costly, because remote performance of a task limits the opportunities for monitoring and coordinating workers. To capture this aspect of reality, our model features heterogeneous offshoring costs for the various tasks. In each industry, firms choose the geographic organization