A Simple Theory of Offshoring and Reshoring

In this study, we predict a pattern of offshoring and reshoring over the course of economic development. We achieve this, by extending Grossman and Rossi-Hansberg's (2008) model of offshoring in a simple way by assuming that offshoring requires both workers and capital in the offshored country. As a consequence, the accumulation of capital in the offshored country has two opposing effects on offshoring. On the one hand, it increases the wage rate of workers rendering offshoring less attractive. On the other hand, it decreases the rental price of capital rendering offshoring more attractive. Putting these two effects together, we analytically generate the inverted-U pattern of offshoring recently observed in China.