Globalization and Relocation in a Vertically Differentiated Industry

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