Export Outsourcing : Cost Disadvantage and Reputation Advantage

A new type of outsourcing, export outsourcing, has become increasingly important in recent years. Export outsourcing is the practice in which firms that receive export orders subcontract part or all of order to low-wage countries, playing the dual role of a middleman and a manufacturer. Its major features include the involvement of three parties rather than two, information asymmetry between the three parties, and a reputation payoff to the intermediary firm in the presence of cost disadvantage. Apparent resemblance aside, export outsourcing differs in important aspects from the 'output outsourcing' by large firms, the deepening of vertical specialization, the outsourcing of service jobs, and traditional intermediation. Using Taiwanese firms as an example, the paper shows in detail how export outsourcing is practiced, and discusses the implications for the future and for other economies