Globalization and Relocation in a Vertically Differentiated Industry

20 Pages Posted: 15 Feb 2006

See all articles by Tito Cordella

Tito Cordella

World Bank

Isabel Grilo

Catholic University of Louvain

Date Written: April 1998

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: Production Relocation, Vertical Differentiation, Bertrand Competition, Globalization

JEL Classification: F02, F12, F23, J60, L13

Suggested Citation

Cordella, Tito and Grilo, Isabel, Globalization and Relocation in a Vertically Differentiated Industry (April 1998). IMF Working Paper No. 98/48, Available at SSRN: https://ssrn.com/abstract=882304

Tito Cordella (Contact Author)

World Bank ( email )

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Washington, DC 20433
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Isabel Grilo

Catholic University of Louvain ( email )

Place Montesquieu, 3
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Belgium
010 47 43 60 (Phone)

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