“Globalization” and Relocation in a Vertically Differentiated Industry

Isabel Grilo and Tito Cordella

No 1998/048, IMF Working Papers from International Monetary Fund

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.

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 (search for similar items in EconPapers)
Pages: 20
Date: 1998-04-01
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Citations: View citations in EconPapers (9)

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Working Paper: 'Globalization' and Relocation in a Vertically Differentiated Industry (1998)
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