Global outsourcing or foreign direct investment: Why apple chose outsourcing for the iPod

A simple model is presented, where a firm's productivity is endogenized by its R&D investment. It shows that the most productive firms may prefer international outsourcing to foreign direct investment (FDI) in industries with a high innovation share. The high innovation share motivates the firms to economize on organizational cost in order to save resources for R&D investment, making outsourcing preferable to FDI because the former incurs a smaller organizational cost. This model helps explain why Apple Inc., belonging to the electronics industry, which has a particularly high innovation share, launched its innovative iPod through international outsourcing instead of FDI.