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'Globalization' and Relocation in a Vertically Differentiated Industry

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  • Cordella, Tito
  • Grilo, Isabel

Abstract

In this paper, we adopt the vertical differentiation duopoly framework to give a full description of firms’ relocation decisions, when the removal either of trade barriers or of restrictions on capital outflows/inflows (‘globalization’) allows them to serve the domestic market through foreign plants. We identify the advantages associated with production abroad with the possibility of exploiting a given wage differential. We show that when the liberalization of trade or investment flows yields the relocation of the whole industry, autarchy is strictly better, in welfare terms, than ‘globalization’. It is only when relocation is a dominant strategy for one (and only one) of the firms, that ‘globalization’ may be unambiguously welfare improving. Furthermore, we show that the effects of the relocation of the high or of the low quality firm are different. In particular, if the economy is ‘high quality biased’ (‘low quality biased’) the relocation of the firm producing the high quality variant (the low quality variant) is preferred, in welfare terms, to the relocation of the other firm, if the wage differential is high enough.

Suggested Citation

  • Cordella, Tito & Grilo, Isabel, 1998. "'Globalization' and Relocation in a Vertically Differentiated Industry," CEPR Discussion Papers 1863, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:1863
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    Citations

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    Cited by:

    1. Giorgio Barba Navaretti & Anna Falzoni & Alessandro Turrini, 2001. "The decision to invest in a low-wage country: Evidence from Italian textiles and clothing multinationals," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 10(4), pages 451-470.
    2. Jacques-François Thisse & Tanguy van Ypersele, 1999. "Métropoles et concurrence territoriale," Économie et Statistique, Programme National Persée, vol. 326(1), pages 19-30.
    3. Cordella, Tito & Grilo, Isabel, 2001. "Social dumping and relocation: is there a case for imposing a social clause?," Regional Science and Urban Economics, Elsevier, vol. 31(6), pages 643-668, November.
    4. José Azevedo-Pereira & Gualter Couto & Cláudia Nunes, 2010. "Optimal timing of relocation," International Journal of Managerial Finance, Emerald Group Publishing, vol. 6(2), pages 143-163, April.
    5. Pennings, Enrico & Sleuwaegen, Leo, 2000. "International relocation: firm and industry determinants," Economics Letters, Elsevier, vol. 67(2), pages 179-186, May.
    6. Mary Amiti & Shang-Jin Wei, 2005. "Service Offshoring, Productivity, and Employment; Evidence from the United States," IMF Working Papers 05/238, International Monetary Fund.
    7. Mary Amiti & Shang-Jin Wei, 2006. "Service Offshoring and Productivity: Evidence from the United States," NBER Working Papers 11926, National Bureau of Economic Research, Inc.
    8. Amiti, Mary & Wei, Shang-Jin, 2006. "Service Offshoring, Productivity and Employment: Evidence from the US," CEPR Discussion Papers 5475, C.E.P.R. Discussion Papers.
    9. Mary Amiti & Shang-Jin Wei, 2009. "Service Offshoring and Productivity: Evidence from the US," The World Economy, Wiley Blackwell, vol. 32(2), pages 203-220, February.
    10. repec:taf:pocoec:v:28:y:2016:i:1:p:16-33 is not listed on IDEAS

    More about this item

    Keywords

    Bertrand Competition; Globalization; Production Relocation; vertical differentiation;

    JEL classification:

    • F02 - International Economics - - General - - - International Economic Order and Integration
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • J60 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - General
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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