Location of Vertically Linked Industries: Agglomeration versus Comparative Advantage

Mary Amiti

No 2800, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This Paper analyses the effects of reducing trade costs on the location of manufacturing firms that are vertically linked and differ in factor intensities. I extend the new economic geography literature, by embedding a model with vertical linkages within a Heckscher-Ohlin framework. Firms can choose to locate either in a labour-abundant country or a capital-abundant country. I show that lower trade costs on intermediate inputs and final goods can lead to an agglomeration of all upstream and downstream firms in one country, even when they differ in factor intensities. Hence, for some ranges of trade costs, industries may locate in countries where standard trade models would suggest they would not locate. For example labour-intensive industries may locate in capital abundant countries. This also has implications for whether trade liberalization leads in the direction of factor price equalization. If the share of manufacturing is high, trade liberalization (from high to medium) leads to an increase in the return to both factors in the country where manufacturing agglomerates.

Keywords: Downstream firms; Trade liberalization; Trade costs; Upstream firms; Vertical links (search for similar items in EconPapers)
JEL-codes: F10 F12 F15 (search for similar items in EconPapers)
Date: 2001-05
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (32)

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Related works:
Journal Article: Location of vertically linked industries: agglomeration versus comparative advantage (2005)
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