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Cost Competition, Fragmentation and Globalization
Michael C. Burda Humboldt University of Berlin - Faculty of Economics; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Institute for the Study of Labor (IZA) Barbara Dluhosch University of Cologne; Humboldt University of Berlin - Department of Mathematics December 2000 CESifo Working Paper Series No. 393 Abstract: This paper proposes a model in which the removal of barriers to trade and factor mobility is associated with endogenous fragmentation of the value-added chain. Fragmentation is the outcome of cost competition; the profit-maximizing choice of cost structure by monopolistically competitive firms. An expansion of the integrated trading area can induce globalization not only in the horizontal dimension associated with love-of-variety preferences, but also in a vertical dimension as firms vary specialization of production stages. While increased trade is likely to induce fragmentation when the number of firms is fixed, free entry can either reverse or intensify this result.
Keywords: International Trade, Organization of Production, Technology Choice, Division of Labor JEL Classifications: F10, L23, O33 Working Paper SeriesDate posted: February 26, 2001 ; Last revised: August 11, 2004Suggested CitationContact Information
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