“Globalization” and Relocation in a Vertically Differentiated Industry

April 1, 1998

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

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:
https://doi.org/10.5089/9781451846713.001
Issue:
048
Series:
Working Paper No. 1998/048
Stock No:
WPIEA0481998
ISBN:
9781451846713
ISSN:
1018-5941

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