“Globalization” and Relocation in a Vertically Differentiated Industry
April 1, 1998
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Summary
This paper uses a vertical differentiation duopoly framework to analyze firms’ relocation decisions, when the removal of trade barriers or restrictions on capital outflows or inflows (“globalization”) allows them to serve the domestic market through foreign plants in low-wage countries. The relocation of the entire industry yields net welfare costs, but the relocation of one (and only one) firm, may be welfare improving. When the economy is “high-(or low-) quality biased,” the relocation of the firm producing the high- (or low-) quality variant is preferred, on welfare terms, to that of other firms, if the wage differential is large enough.
Subject: Globalization, International trade, Labor, Labor costs, Trade liberalization, Unemployment, Wages
Keywords: Bertrand Competition, Europe, Global, Globalization, high-quality firm, incremental cost, labor cost wi, Labor costs, location decision, low-quality firm, market share, Production Relocation, relocation choice, Trade liberalization, Unemployment, Vertical Differentiation, Wages, WP
Pages:
20
Volume:
1998
DOI:
Issue:
048
Series:
Working Paper No. 1998/048
Stock No:
WPIEA0481998
ISBN:
9781451846713
ISSN:
1018-5941
