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Aspects of International Fragmentation

In: European Economic Integration, WTO Membership, Immigration and Offshoring


  • Wilhelm Kohler


The paper uses a specific-factors framework to address efficiency and distributional implications of international fragmentation which is driven by a low foreign wage rate. Focusing on the cost-savings linkage between fragmentation and labor demand in the remaining domestic activities, the author establishes a fragmentation surplus. If capital is an indivisible asset specific to the fragment produced abroad, 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 domestic production to fragmentation is modeled as a two-stage game. In stage one, firms locate indivisible assets at home or abroad; in stage two they choose optimal employment. The share of fragmented firms is endogenously determined. The paper explores conditions under which outsourcing is beneficial for the domestic economy.

Suggested Citation

  • Wilhelm Kohler, 2014. "Aspects of International Fragmentation," World Scientific Book Chapters, in: European Economic Integration, WTO Membership, Immigration and Offshoring, chapter 7, pages 231-263, World Scientific Publishing Co. Pte. Ltd..
  • Handle: RePEc:wsi:wschap:9789814440196_0007

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