"Globalization" and Relocation in a Vertically Differentiated Industry
AbstractIn this paper, we adopt the vertical differentiation duopoly framework to give a full description of firmsâ relocation decisions, when the removal either of trade barriers or of restrictions on capital outflows/inflows (âglobalizationâ) 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 âglobalizationâ. It is only when relocation is a dominant strategy for one (and only one) of the firms, that âglobalizationâ 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 âhigh quality biasedâ (âlow quality biasedâ) 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 InfoPaper provided by International Monetary Fund in its series IMF Working Papers with number 98/48.
Date of creation: 01 Apr 1998
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Other versions of this item:
- Cordella, Tito & Grilo, Isabel, 1998. "'Globalization' and Relocation in a Vertically Differentiated Industry," CEPR Discussion Papers 1863, C.E.P.R. Discussion Papers.
- F02 - International Economics - - General - - - International Economic Order; Noneconomic International Organizations;; Economic Integration and Globalization: General
- F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies
- F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
- J60 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - General
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
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