Introduction

Over the second half of the century, the formation of several institutions involved in the reduction of tariff and nontariff barriers have advocated and promoted free trade between nations. The countries have also obliged either due to their acknowledgement of accrued benefits or because of sociopolitical compulsions. Consequently, the reduction in trade barriers by most countries has given international trade an impetus like never before. This reduction in barriers to international trade and investment and increasing global competition have driven producers across national borders to take advantage of lower costs abroad. Importantly, along with an increase in volume, there has also been a distinct change in the pattern of trade. The shift in trade pattern in favor of intraindustry trade led to an important question—can internal production organization of a firm or an industry alter the modalities of international trade?

The ease of doing international trade has played a crucial role in determining the international pattern of production and organizational forms. The proliferation of transnational production manifested via segmentation of production processes and coordination of the related activities has largely been possible because of reduction in trade barriers and innovations and improvements in information and communication technology. In addition, the new production organization has been aided by stricter protection of property rights and improved legal as well as business environment (Borrus and Zysman, 1997; Kaminiski and Ng, 2001). Notably, the segmentation of a single production process can be done in several ways. It is usually performed either by fragmenting and shifting a part of the production to a nonaffiliated, independent firm1 or by collaborating with other firms, which can produce at a cheaper rate. The decision that the firm will take, to integrate or to outsource, depends on several costs and contingencies as transaction costs, asset specificity2, completeness of contracts, etc. However, as Grossman and Helpman (2002, 1) put it, ‘outsourcing is more prevalent in some industries than others’, typically because the choice is not automatic and in reality depends upon the level of market competition, different cost considerations, input specificity, etc. The most significant feature of production fragmentation is that it allow firms to utilize cheaper external factors for some fragments of the value-added chain. Outsourcing some stages of production process to cheaper international location makes production less costly and, therefore, releases resources that could be directed elsewhere.