Fragmentation Across Cones

This paper examines the effects of fragmentation across cones of diversification in the Heckscher-Ohlin model of international trade. Fragmentation is defined as the splitting of production processes into parts that can be done in different countries. Such fragmentation may occur in a world of factor price equalization (FPE) only if it is costless, and even then it is uninteresting. It becomes more important in a world without FPE, where countries operate in different diversification cones. In that case even costly fragmentation (which uses more resources than the original) may be able to produce a good at a lower cost than the original unfragmented technology, if it can take advantage of different factor prices in different countries. The paper shows when this will be the case, then goes on to examine the effects of fragmentation on factor prices. It is already known that introduction of fragmentation can lead to FPE when FPE did not obtain initially. But it need not do so, and the paper explores the directions of the effects on relative factor prices when they do not become equalized. It turns out that factor prices may actually be driven further apart by fragmentation. This is suggested diagrammatically, and also shown more formally for the case of Cobb-Douglas preferences and technologies.