International Fragmentation of Value-added Chains: How Does it Affect Domestic Factor Prices?

Wilhelm Kohler

No 01-03, EPRU Working Paper Series from Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics

Abstract: Economic globalization causes an increasing international fragmentation of value-added chains. A question often raised is whether such outsourcing affects domestic income distribution. The paper provides a theoretical treatment of this issue within a Heckscher-Ohlin framework. It extends beyond previous treatments by allowing for an arbitrary number of goods, factors, and fragments, and by formally specifying a "fragmentation technology". It defines a "margin of international fragmentation" and shows how this margin shifts in response to economic globalization. Factor prices are driven by associated changes in "effective prices" of individual fragments of the value-added chains.

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