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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.

Suggested Citation

  • Wilhelm Kohler, 2003. "Factor Price Frontiers with International Fragmentation of Multistage Production," Economics working papers 2003-05, Department of Economics, Johannes Kepler University Linz, Austria.
  • Handle: RePEc:jku:econwp:2003_05
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    References listed on IDEAS

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    1. Deardorff, A.V., 1998. "Fragmentation Across Cones," Working Papers 427, Research Seminar in International Economics, University of Michigan.
    2. Gene M. Grossman & Elhanan Helpman, 2005. "Outsourcing in a Global Economy," Review of Economic Studies, Oxford University Press, vol. 72(1), pages 135-159.
    3. Robert C. Feenstra, 1998. "Integration of Trade and Disintegration of Production in the Global Economy," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 31-50, Fall.
    4. Richard G. Harris, 1995. "Trade and Communication Costs," Canadian Journal of Economics, Canadian Economics Association, vol. 28(s1), pages 46-75, November.
    5. Feenstra, R.C. & Hanson, G.H., 1995. "Foreign Investment, Outsourcing and Relative Wages," Papers 95-14, California Davis - Institute of Governmental Affairs.
    6. Deardorff, Alan V., 2001. "Fragmentation in simple trade models," The North American Journal of Economics and Finance, Elsevier, vol. 12(2), pages 121-137, July.
    7. Avinash K. Dixit & Gene M. Grossman, 1982. "Trade and Protection with Multistage Production," Review of Economic Studies, Oxford University Press, vol. 49(4), pages 583-594.
    8. 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.
    9. 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.
    10. 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.
    11. Wilhelm Kohler, 2003. "The Distributional Effects of International Fragmentation," German Economic Review, Verein für Socialpolitik, vol. 4(1), pages 89-120, February.
    12. Arndt, Sven W., 1997. "Globalization and the open economy," The North American Journal of Economics and Finance, Elsevier, vol. 8(1), pages 71-79.
    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.
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    More about this item

    JEL classification:

    • D33 - Microeconomics - - Distribution - - - Factor Income Distribution
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F15 - International Economics - - Trade - - - Economic Integration
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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