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Globalization and Relocation in a Vertically Differentiated Industry

Опубликовано на портале: 22-12-2003
IMF Working Paper Series. 1998.  No. 98/48 .
Организация: International Monetary Fund (International Monetary Fund)
This paper uses a vertical differentiation duopoly framework to analyze firms. relocation decisions when the removal either of trade barriers or of restrictions on capital outflows or inflows (globalization) allows them to serve the domestic market through foreign plants employing cheaper foreign labor.

The paper addresses two issues. First, it tries to explain which firms, within a specific industry, have the stronger incentives in relocating their production facilities in low-wage countries. It shows that such incentives are higher for the firm producing the variety that would have a larger market share if the two goods were sold at their marginal cost.

Second, it assesses the welfare consequences of the decision of domestic firms to serve the domestic market through foreign plants. More precisely, it compares domestic welfare under autarchy and under globalization. The recognition of the consequences of relocation on unemployment allows to explicitly take into account the associated variations in workers. surplus, when performing the welfare analysis. In this second-best world, when the complete liberalization of trade and capital flows leads to the relocation of the whole industry, autarchy is strictly better, on domestic welfare terms, than globalization. However, when relocation is a dominant strategy for one (and only one) firm, globalization may unambiguously be welfare improving. Finally, and somehow against the common wisdom, the paper shows that the welfare cost of relocation is lower, the lower is the level of the foreign wage.

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