Aspects of International Fragmentation

Wilhelm Kohler

Chapter 7 in European Economic Integration, WTO Membership, Immigration and Offshoring, 2014, pp 231-263 from World Scientific Publishing Co. Pte. Ltd.

Abstract: The paper uses a specific-factors framework to address efficiency and distributional implications of international fragmentation which is driven by a low foreign wage rate. Focusing on the cost-savings linkage between fragmentation and labor demand in the remaining domestic activities, the author establishes a fragmentation surplus. If capital is an indivisible asset specific to the fragment produced abroad, then fragmentation may cause a domestic welfare loss, because outsourcing takes place in discrete steps where it affords firms “quasi-market-power” on the domestic labor market. The regime shift from domestic production to fragmentation is modeled as a two-stage game. In stage one, firms locate indivisible assets at home or abroad; in stage two they choose optimal employment. The share of fragmented firms is endogenously determined. The paper explores conditions under which outsourcing is beneficial for the domestic economy.

Keywords: Economic Integration; WTO Membership; Immigration; Offshoring; European Union; International Trade; Migration; Gravity; Germany; Equilibrium; Tariff Liberalization; Commercial Policy; Eastern Enlargement (search for similar items in EconPapers)
Date: 2014
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