Offshoring and Directed Technical Change

We study the implications of offshoring on innovation, technology, and wage inequality in a Ricardian model with directed technical change. Profit maximization determines both the extent of offshoring and the direction of technological progress. A fall in the offshoring cost induces technical change with an ambiguous factor bias. When the initial cost of offshoring is high, an increase in offshoring opportunities causes a fall in the real wages of unskilled workers in industrial countries, skill-biased technical change and rising skill premia. When the offshoring cost is sufficiently low, instead, offshoring induces technical change biased in favor of the unskilled workers.