Modularity and the organization of international production

In recent decades, the global electronics industry has experienced a large reorganization. U.S. electronics firms have on a large scale off-shored and outsourced their manufacturing activities. Japanese electronics firms have offshored a large portion of their manufacturing, but have remained vertically integrated. To account for these industry trends, we build an two-country industry-equilibrium model in which firms concurrently choose (i) a product architecture, (ii) an ownership structure and (iii) a location for production. We demonstrate that technological advances that allow firms to more easily modularize their products can explain the co-evolving trends of offshoring and outsourcing. We also assess the role of technology on the different patterns of reorganization between Japanese and U.S. firms.