The role of overseas Chinese-speaking regions in global sourcing

•We incorporate intermediate-good producers to Antràs and Helpman's (2004) model.•The most productive firms in skill-intensive industries do not always choose FDI.•Instead, they prefer employing the intermediate-good producers to carry out FDI.

Why do many of the world's most productive firms prefer global outsourcing to FDI? To address this issue, this paper introduces an intermediate-good producer to Antràs and Helpman's (2004) North-South model, where the Northern firms can employ the producer via an outsourcing contract and have the producer engage in FDI in the South. This strategy could substantially reduce both the incomplete contract distortion and the associated tailoring cost if the intermediate-good producer shares ethnic heritage with the South. Then, the most productive firms, not only in the consumer electronics but also the labor-intensive industries, overwhelmingly apply this strategy rather than FDI.