Organizing Offshoring: Middle Managers and Communication Costs

Why do firms decide to offshore certain parts of their production process? Whatqualifies certain countries as particularly attractive locations to offshore? In thispaper we address these questions with a theory of international production hierarchiesin which organizations arise endogenously to make efficient use of agents’knowledge. Our theory highlights the role of host-country management skills (middlemanagement) in bringing about the emergence of international offshoring. Byshielding top management in the source country from routine problems faced byhost country workers, the presence of middle managers improves the efficiency ofthe transmission of knowledge across countries. The model further delivers the predictionthat the positive effect of middle skills on offshoring is weaker, the moreadvanced are communication technologies in the host country. We provide evidenceconsistent with this prediction.[...]