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“Globalization” and Relocation in a Vertically Differentiated Industry

Author

Listed:
  • Ms. Isabel Grilo
  • Mr. Tito Cordella

Abstract

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.

Suggested Citation

  • Ms. Isabel Grilo & Mr. Tito Cordella, 1998. "“Globalization” and Relocation in a Vertically Differentiated Industry," IMF Working Papers 1998/048, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:1998/048
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    Citations

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    Cited by:

    1. Jacques-François Thisse & Tanguy van Ypersele, 1999. "Métropoles et concurrence territoriale," Économie et Statistique, Programme National Persée, vol. 326(1), pages 19-30.
    2. Cordella, Tito & Grilo, Isabel, 2001. "Social dumping and relocation: is there a case for imposing a social clause?," Regional Science and Urban Economics, Elsevier, vol. 31(6), pages 643-668, November.
    3. Mary Amiti & Shang-Jin Wei, 2006. "Service Offshoring and Productivity: Evidence from the United States," NBER Working Papers 11926, National Bureau of Economic Research, Inc.
    4. Mary Amiti & Shang‐Jin Wei, 2009. "Service Offshoring and Productivity: Evidence from the US," The World Economy, Wiley Blackwell, vol. 32(2), pages 203-220, February.
    5. Eric Rugraff & Magdolna Sass, 2016. "Voting for staying. Why didn’t the foreign-owned automotive component suppliers relocate their activity from Hungary to lower-wage countries as a response to the economic crisis?," Post-Communist Economies, Taylor & Francis Journals, vol. 28(1), pages 16-33, January.
    6. Giorgio Barba Navaretti & Anna Falzoni & Alessandro Turrini, 2001. "The decision to invest in a low-wage country: Evidence from Italian textiles and clothing multinationals," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 10(4), pages 451-470.
    7. José Azevedo‐Pereira & Gualter Couto & Cláudia Nunes, 2010. "Optimal timing of relocation," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 6(2), pages 143-163, April.
    8. Wei, Shang-Jin & Amiti, Mary, 2006. "Service Offshoring, Productivity and Employment: Evidence from the US," CEPR Discussion Papers 5475, C.E.P.R. Discussion Papers.
    9. Mary Amiti & Shang-Jin Wei, 2005. "Service Offshoring, Productivity, and Employment: Evidence from the United States," IMF Working Papers 2005/238, International Monetary Fund.
    10. Pennings, Enrico & Sleuwaegen, Leo, 2000. "International relocation: firm and industry determinants," Economics Letters, Elsevier, vol. 67(2), pages 179-186, May.

    More about this item

    Keywords

    WP; incremental cost; market share; Production Relocation; Vertical Differentiation; Bertrand Competition; Globalization; low-quality firm; high-quality firm; location decision; relocation choice; labor cost wi; Wages; Labor costs; Trade liberalization; Unemployment; Global; Europe;
    All these keywords.

    JEL classification:

    • F02 - International Economics - - General - - - International Economic Order and Integration
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • J60 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - General
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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