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The Distributional Effects of International Fragmentation

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    Abstract

    Economic globalization causes an increasing international fragmentation (disintegration) of value-added-chains, whereby firms outsource components of production to foreign markets. There is a high level of concern about unwelcome distributional effects. This paper provides a theoretical treatment of this issue within a general Heckscher-Ohlin framework, allowing for an arbitrary number of goods, factors, and fragments. It shows how a fragmented production equilibrium is disturbed by lower costs of fragmentation, and it introduces the concept of effective prices of fragments to derive general results that characterize the distributional consequences of an increase in international fragmentation occurring simultaneously in several industries.

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    Paper provided by Department of Economics, Johannes Kepler University Linz, Austria in its series Economics working papers with number 2002_01.

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    Date of creation: Apr 2002
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    Handle: RePEc:jku:econwp:2002_01

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    1. 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..
    2. Deardorff, A.V., 1998. "Fragmentation Across Cones," Working Papers 427, Research Seminar in International Economics, University of Michigan.
    3. Robert C. Feenstra & Gordon H. Hanson, 1995. "Foreign Direct Investment and Relative Wages: Evidence from Mexico's Maquiladoras," NBER Working Papers 5122, National Bureau of Economic Research, Inc.
    4. Paul Krugman, 1995. "Growing World Trade: Causes and Consequences," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(1, 25th A), pages 327-377.
    5. McLaren, J., 1996. "'Globalization' and Vertical Structure," Discussion Papers 1996_21, Columbia University, Department of Economics.
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    7. Irwin, Douglas A, 1996. "The United States in a New Global Economy? A Century's Perspective," American Economic Review, American Economic Association, vol. 86(2), pages 41-46, May.
    8. Deardorff, Alan V., 1979. "Weak links in the chain of comparative advantage," Journal of International Economics, Elsevier, vol. 9(2), pages 197-209, May.
    9. Hummels, David & Ishii, Jun & Yi, Kei-Mu, 2001. "The nature and growth of vertical specialization in world trade," Journal of International Economics, Elsevier, vol. 54(1), pages 75-96, June.
    10. Gene M. Grossman & Elhanan Helpman, 2002. "Integration Versus Outsourcing In Industry Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 117(1), pages 85-120, February.
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    12. Holger Görg, 2000. "Fragmentation and trade: US inward processing trade in the EU," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 136(3), pages 403-422, 09.
    13. James R. Markusen, 2004. "Multinational Firms and the Theory of International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262633078, December.
    14. Arndt, Sven W., 1997. "Globalization and the open economy," The North American Journal of Economics and Finance, Elsevier, vol. 8(1), pages 71-79.
    15. Deardorff, A.V., 1998. "Fragmentation in Simple Trade Models," Working Papers 422, Research Seminar in International Economics, University of Michigan.
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    17. Richard G. Harris, 1995. "Trade and Communication Costs," Canadian Journal of Economics, Canadian Economics Association, vol. 28(s1), pages 46-75, November.
    18. Wilfred J. Ethier, 1977. "The Theory of Effective Protection in General Equilibrium: Effective-Rate Analogues of Nominal Rates," Canadian Journal of Economics, Canadian Economics Association, vol. 10(2), pages 233-45, May.
    19. Ronald W. Jones, 2000. "Globalization and the Theory of Input Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 026210086x, December.
    20. Ethier, Wilfred J., 1984. "Higher dimensional issues in trade theory," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 1, chapter 3, pages 131-184 Elsevier.
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    Cited by:
    1. Michel Dumont, 2006. "Foreign outsourcing, labour demand and the choice of functional form," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 255-273, November.

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