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Location of vertically linked industries: agglomeration versus comparative advantage

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  • Amiti, Mary

Abstract

This Paper analyses the effects of reducing trade costs on the location of manufacturing firms that are vertically linked and differ in factor intensities. I extend the new economic geography literature, by embedding a model with vertical linkages within a Heckscher-Ohlin framework. Firms can choose to locate either in a labour-abundant country or a capital-abundant country. I show that lower trade costs on intermediate inputs and final goods can lead to an agglomeration of all upstream and downstream firms in one country, even when they differ in factor intensities. Hence, for some ranges of trade costs, industries may locate in countries where standard trade models would suggest they would not locate. For example labour-intensive industries may locate in capital abundant countries. This also has implications for whether trade liberalization leads in the direction of factor price equalization. If the share of manufacturing is high, trade liberalization (from high to medium) leads to an increase in the return to both factors in the country where manufacturing agglomerates.

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Bibliographic Info

Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 49 (2005)
Issue (Month): 4 (May)
Pages: 809-832

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Handle: RePEc:eee:eecrev:v:49:y:2005:i:4:p:809-832

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  1. Krugman, Paul & Venables, Anthony J., 1995. "Globalization and the Inequality of Nations," Working Paper Series 430, Research Institute of Industrial Economics.
  2. Paul Krugman, 1990. "Increasing Returns and Economic Geography," NBER Working Papers 3275, National Bureau of Economic Research, Inc.
  3. Mary Amiti, 1998. "Regional Specialisation and Technological Leapfrogging," Working Papers 1998.14, School of Economics, La Trobe University.
  4. Deardorff, Alan V., 2001. "Fragmentation in simple trade models," The North American Journal of Economics and Finance, Elsevier, vol. 12(2), pages 121-137, July.
  5. Anthony J. Venables, 1993. "Equilibrium Locations of Vertically Linked Industries," CEP Discussion Papers dp0137, Centre for Economic Performance, LSE.
  6. Dixit, Avinash K & Grossman, Gene M, 1982. "Trade and Protection with Multistage Production," Review of Economic Studies, Wiley Blackwell, vol. 49(4), pages 583-94, October.
  7. Forslid, Rikard & Wooton, Ian, 1999. "Comparative Advantage and the Location of Production," CEPR Discussion Papers 2118, C.E.P.R. Discussion Papers.
  8. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
  9. Deardorff, A.V., 1998. "Fragmentation Across Cones," Papers 98-14, Michigan - Center for Research on Economic & Social Theory.
  10. Sanyal, Kalyan K & Jones, Ronald W, 1982. "The Theory of Trade in Middle Products," American Economic Review, American Economic Association, vol. 72(1), pages 16-31, March.
  11. David Hummels & Jun Ishii & Kei-Mu Yi, 1999. "The nature and growth of vertical specialization in world trade," Staff Reports 72, Federal Reserve Bank of New York.
  12. Ethier, Wilfred J, 1982. "National and International Returns to Scale in the Modern Theory of International Trade," American Economic Review, American Economic Association, vol. 72(3), pages 389-405, June.
  13. repec:fth:iniesr:430 is not listed on IDEAS
  14. Antonio Ricci, Luca, 1999. "Economic geography and comparative advantage:: Agglomeration versus specialization," European Economic Review, Elsevier, vol. 43(2), pages 357-377, February.
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