The last decades were characterized by large increases in world trade, not only in absolute terms, but also in relation to world GDP. This was in large parts caused by increasing exchanges of parts and components between countries as a consequence of international fragmentation of production. Apparently, greater competition especially from the Newly Industrializing and Post-Communist Economies prompted firms in ‘high-wage’ countries to exploit international factor price differences in order to increase their international competitiveness. However, theory predicts that, beside factor price differences, vertical disintegration of production should be driven by a multitude of additional factors. Against this background, the present paper reveals empirical evidence on parts and components trade as an indicator for international fragmentation of production in the European Union. On the basis of a panel data approach, the main explanatory factors for international fragmentation of production are determined. The results show that, although their influence can not be neglected, factor price differences are only one out of many causes for shifting production to or sourcing components from foreign countries.
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Paper provided by Halle Institute for Economic Research in its series IWH Discussion Papers with number
15-07.
Find related papers by JEL classification: F14 - International Economics - - Trade - - - Country and Industry Studies of Trade F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
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Grossman, G.M. & Helpman, E., 2002.
"Outsourcing in a Global Economy,"
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218, Princeton, Woodrow Wilson School - Public and International Affairs.
Gene M. Grossman & Elhanan Helpman, 2002.
"Outsourcing in a Global Economy,"
Working Papers
149, Princeton University, Woodrow Wilson School of Public and International Affairs, Discussion Papers in Economics..
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