Factor price frontiers with international fragmentation of multistage production

This paper investigates international fragmentation in a modeling framework where the multi-stage nature of industrial production is made explicitly, and where the engineering sequence of stages is juxtaposed with a sequence of increasing economic incentive for international fragmentation. Assuming that there are two tradable goods sectors, a multi-stage sector amenable to international fragmentation and a standard sector where production is always fully integrated in the domestic economy, I first explore the nature and shape of the domestic factor price frontier, endogenously determining the margin of international fragmentation under given world prices for the two goods. I then explore the consequences of an exogenous change in the terms of trade on the margin of international fragmentation, and the implications of a fall in the cost of transport and communication that facilitates an increasing degree of international fragmentation.