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Aspects of International Fragmentation

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    Abstract

    The paper uses a specific-factors framework to address efficiency and distributional implications of international fragmentation which is driven by a foreign location advantage due to a low wage rate. Focusing on the cost-savings linkage between fragmentation and labor demand in the remaining domestic activities, I establish a fragmentation surplus which is familiar to the immigration surplus. However, if the capital which is specific to the fragment produced abroad is an indivisible asset, then fragmentation may cause a domestic welfare loss, because outsourcing takes place in discrete steps where it affords firms "quasi-market-power" on the domestic labor market. The regime shift from purely domestic production to fragmentation is modeled as a two-stage game. In the first stage firms locate their indivisible assets at home or abroad, and in the second they choose optimal employment. The share of fragmented firms is endogenously determined. The paper explores the conditions determining whether the process of fragmentation caused by less costly outsourcing is beneficial for the domestic economy.

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    File URL: http://www.econ.jku.at/papers/2002/wp0208.pdf
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    Paper provided by Department of Economics, Johannes Kepler University Linz, Austria in its series Economics working papers with number 2002-08.

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    Date of creation: May 2002
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    Handle: RePEc:jku:econwp:2002_08

    Note: Fortcoming in Review of International Economics.
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    1. Richard G. Harris, 1995. "Trade and Communication Costs," Canadian Journal of Economics, Canadian Economics Association, vol. 28(s1), pages 46-75, November.
    2. Feenstra, R.C. & Hanson, G.H., 1995. "Foreign Investment, Outsourcing and Relative Wages," Papers 95-14, California Davis - Institute of Governmental Affairs.
    3. Deardorff, A.V., 1998. "Fragmentation in Simple Trade Models," Working Papers 422, Research Seminar in International Economics, University of Michigan.
    4. Wilhelm Kohler, 2003. "The Distributional Effects of International Fragmentation," German Economic Review, Verein für Socialpolitik, vol. 4(1), pages 89-120, February.
    5. Venables, Anthony J., 1999. "Fragmentation and multinational production," European Economic Review, Elsevier, vol. 43(4-6), pages 935-945, April.
    6. Arndt, Sven W., 1997. "Globalization and the open economy," The North American Journal of Economics and Finance, Elsevier, vol. 8(1), pages 71-79.
    7. Feenstra, Robert C. & Hanson, Gordon H., 1997. "Foreign direct investment and relative wages: Evidence from Mexico's maquiladoras," Journal of International Economics, Elsevier, vol. 42(3-4), pages 371-393, May.
    8. 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.
    9. Deardorff, A.V., 1998. "Fragmentation Across Cones," Papers 98-14, Michigan - Center for Research on Economic & Social Theory.
    10. 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.
    11. Arndt, Sven W. & Kierzkowski, Henryk (ed.), 2001. "Fragmentation: New Production Patterns in the World Economy," OUP Catalogue, Oxford University Press, number 9780199243310, September.
    12. Borjas, George J., 1999. "The economic analysis of immigration," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 28, pages 1697-1760 Elsevier.
    13. 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.
    14. Dani Rodrik, 1998. "Symposium on Globalization in Perspective: An Introduction," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 3-8, Fall.
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    Cited by:
    1. Kurt Kratena, 2004. "Intra-Industry Trade and Input Demand," WIFO Working Papers 238, WIFO.

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