Essays on International Fragmentation and Intermediate Goods Trade.

Abstract

Chapter 1 addresses the choice of production location for a Northern firm between a developed country (the North) and a developing country (the South), where spillover of knowledge occurs from the Northern firm producing a high quality product to Southern firms producing a low quality product. I examine the effect, on the firm’s location choice, of consumers’ preference and growth of the market for the high quality product, consumers’ preference for the low quality product and consumers’ response to the price of the low quality product, intellectual property protection, and efficiency of production technology. Chapter 2 examines the relation between capital movement and intermediate goods trade. If two countries have identical relative endowments of capital and labor, identical technologies for a continuum of final goods, for a single non-tradable final good, and different technologies for an intermediate good, then capital moves from the country with the efficient technology for the intermediate good to the country with the less efficient technology for that good. Capital movement and trade in the intermediate good are complements. The share of the intermediate good in total trade rises. Chapter 3 examines how physical networks, loyalty of employees and wages affect international fragmentation and effort. Fragmentation makes employees’ effort increase since it improves the firm’s ability to monitor. The firm therefore increases the number of production stages. The headquarters cost for coordinating and monitoring the production process increases. This cost limits the total number of stages. The international differences in networks, border barriers, loyalty and wages cause the stages to be split into the North and the South. An increase in the Southern network increases outsourcing from North to South. The level of effort in both regions decreases. With globalization, Southern employees’ loyalty falls. Their effort relative to Northern employees’ effort falls, and thus outsourcing decreases. A rise in the Southern wage increases effort of the South relative to the North, and does not affect outsourcing. The effect of a rise in the Northern wage on outsourcing is ambiguous.