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Factor Price Frontiers with International Fragmentation of Multistage Production

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    Abstract

    I develop a generalized factor price frontier which incorporates endogenous adjustment of international fragmentation in multistage production, allowing for a continuum of stages. This allows us to address fragmentation, not only as an exogenous event, but also as an integral part of endogenous adjustment to a variety of changes not directly related to fragmentation. A two-dimensional general equilibrium analysis explores how the margin of fragmentation, as well as factor prices, respond to a change in the final output price, and to an improvement in the "technology of fragmentation". A key distinction arises between the "average" and "marginal" labour intensity, respectively, of domestic production in the multistage industry. The paper identifies conditions under which outsourcing to a low-wage country is a "friend" or an "enemy" to domestic labour, as well as conditions under which the Jonesian magnification e.ects underlying the Stolper-Samuelson theorem are reinforced, or mitigated, by endogenous changes in the margin of fragmentation. Protection may result in a broader or a narrower range of stages produced domestically.

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    Paper provided by Department of Economics, Johannes Kepler University Linz, Austria in its series Economics working papers with number 2003-05.

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    Date of creation: Apr 2003
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    Handle: RePEc:jku:econwp:2003_05

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    1. 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.
    2. Robert Feenstra, 2003. "Integration Of Trade And Disintegration Of Production In The Global Economy," Working Papers 986, University of California, Davis, Department of Economics.
    3. Gene M. Grossman & Elhanan Helpman, 2002. "Outsourcing in a Global Economy," NBER Working Papers 8728, National Bureau of Economic Research, Inc.
    4. 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.
    5. Avinash K. Dixit & Gene M. Grossman, 1981. "Trade and Protection with Multistage Production," NBER Working Papers 0794, National Bureau of Economic Research, Inc.
    6. Feenstra, R.C. & Hanson, G.H., 1995. "Foreign Investment, Outsourcing and Relative Wages," Department of Economics 95-14, California Davis - Department of Economics.
    7. 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.
    8. Deardorff, A.V., 1998. "Fragmentation Across Cones," Working Papers 427, Research Seminar in International Economics, University of Michigan.
    9. Wilhelm Kohler, 2003. "The Distributional Effects of International Fragmentation," German Economic Review, Verein für Socialpolitik, vol. 4(1), pages 89-120, February.
    10. Arndt, Sven W., 1997. "Globalization and the open economy," The North American Journal of Economics and Finance, Elsevier, vol. 8(1), pages 71-79.
    11. Deardorff, A.V., 1998. "Fragmentation in Simple Trade Models," Working Papers 422, Research Seminar in International Economics, University of Michigan.
    12. Francesca Fabbri & Jonathan E. Haskel & Matthew J. Slaughter, 2003. "Does Nationality Of Ownership Matter For Labor Demands?," Journal of the European Economic Association, MIT Press, vol. 1(2-3), pages 698-707, 04/05.
    13. Richard G. Harris, 1995. "Trade and Communication Costs," Canadian Journal of Economics, Canadian Economics Association, vol. 28(s1), pages 46-75, November.
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