Product Cycles, Skill accumulation and International Production

This paper develops a product cycle model for three regions with innovation, outsourcing, and FDI. In our model, we examine the economic effect about international production, which developed countries outsource to the newly industrialized countries (NIEs), while NIEs produce their export orders in the developing countries through FDI. We find that the improvement of the investment environment in the developing countries causes a temporary decrease of innovation rate. Contrarily, it permanently increases the outsourcing rate and decreases the rate of FDI. Furthermore, the fractions of outsourcing and FDI firms increase while the fraction of firms purely producing in the North decreases. In addition, this policy will aggravate the wage inequality in the Middle.