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'Globalization' and Relocation in a Vertically Differentiated Industry

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  • Cordella, Tito
  • Grilo, Isabel

Abstract

In this paper, we adopt the vertical differentiation duopoly framework to give a full description of firms’ relocation decisions, when the removal either of trade barriers or of restrictions on capital outflows/inflows (‘globalization’) allows them to serve the domestic market through foreign plants. We identify the advantages associated with production abroad with the possibility of exploiting a given wage differential. We show that when the liberalization of trade or investment flows yields the relocation of the whole industry, autarchy is strictly better, in welfare terms, than ‘globalization’. It is only when relocation is a dominant strategy for one (and only one) of the firms, that ‘globalization’ may be unambiguously welfare improving. Furthermore, we show that the effects of the relocation of the high or of the low quality firm are different. In particular, if the economy is ‘high quality biased’ (‘low quality biased’) the relocation of the firm producing the high quality variant (the low quality variant) is preferred, in welfare terms, to the relocation of the other firm, if the wage differential is high enough.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1863.

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Date of creation: Apr 1998
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Handle: RePEc:cpr:ceprdp:1863

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Keywords: Bertrand Competition; Globalization; Production Relocation; vertical differentiation;

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Cited by:
  1. Amiti, Mary & Wei, Shang-Jin, 2006. "Service Offshoring, Productivity and Employment: Evidence from the US," CEPR Discussion Papers 5475, C.E.P.R. Discussion Papers.
  2. Barba Navaretti, Giorgio & Falzoni, Anna M & Turrini, Alessandro Antonio, 2000. "The Decision To Invest In A Low-Wage Country: Evidence From Italian Textiles And Clothing Multinationals," CEPR Discussion Papers 2395, C.E.P.R. Discussion Papers.
  3. José Azevedo-Pereira & Gualter Couto & Cláudia Nunes, 2010. "Optimal timing of relocation," International Journal of Managerial Finance, Emerald Group Publishing, vol. 6(2), pages 143-163, April.
  4. Mary Amiti & Shang-Jin Wei, 2005. "Service Offshoring, Productivity, and Employment: Evidence from the United States," IMF Working Papers 05/238, International Monetary Fund.
  5. Pennings, Enrico & Sleuwaegen, Leo, 2000. "International relocation: firm and industry determinants," Economics Letters, Elsevier, vol. 67(2), pages 179-186, May.
  6. Mary Amiti & Shang-Jin Wei, 2006. "Service Offshoring and Productivity: Evidence from the United States," NBER Working Papers 11926, National Bureau of Economic Research, Inc.
  7. Cordella, Tito & Grilo, Isabel, 2001. "Social dumping and relocation: is there a case for imposing a social clause?," Regional Science and Urban Economics, Elsevier, vol. 31(6), pages 643-668, November.

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