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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

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2800.

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Date of creation: May 2001
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Handle: RePEc:cpr:ceprdp:2800

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Keywords: Downstream Firms; Trade Costs; Trade Liberalization; Upstream Firms; Vertical Links;

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References

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  1. Rikard Forslid & Ian Wooton, 2003. "Comparative Advantage and the Location of Production," Review of International Economics, Wiley Blackwell, vol. 11(4), pages 588-603, 09.
  2. 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.
  3. Krugman, Paul & Venables, Anthony J., 1995. "Globalization and the Inequality of Nations," Working Paper Series 430, Research Institute of Industrial Economics.
  4. Deardorff, A.V., 1998. "Fragmentation Across Cones," Working Papers 427, Research Seminar in International Economics, University of Michigan.
  5. Mary Amiti, 1998. "Regional Specialisation and Technological Leapfrogging," Working Papers 1998.14, School of Economics, La Trobe University.
  6. Anthony J. Venables, 1993. "Equilibrium Locations of Vertically Linked Industries," CEP Discussion Papers dp0137, Centre for Economic Performance, LSE.
  7. Krugman, Paul, 1991. "Increasing Returns and Economic Geography," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 483-99, June.
  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. Antonio Ricci, Luca, 1999. "Economic geography and comparative advantage:: Agglomeration versus specialization," European Economic Review, Elsevier, vol. 43(2), pages 357-377, February.
  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. 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.
  12. Avinash K. Dixit & Gene M. Grossman, 1981. "Trade and Protection with Multistage Production," NBER Working Papers 0794, National Bureau of Economic Research, Inc.
  13. Deardorff, A.V., 1998. "Fragmentation in Simple Trade Models," Papers 98-11, Michigan - Center for Research on Economic & Social Theory.
  14. repec:fth:iniesr:430 is not listed on IDEAS
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