Globalization and the Fragmentation of Production

Abstract

In recent years there have been many signs of globalization more open trade, increased levels of foreign investment, etc. One feature is that production processes that in the past have been vertically integrated with all production taking place in one locale have increasingly become fragmented, with more labor-intensive production blocks located in countries with lower wages. These outsourced production blocks need to be coordinated by service links of the form of transportation, communication, and various kinds of knowledge. Increasing returns are primarily found in service link activities, a n d the paper shows how these promote greater degrees of fragmentation of production as income levels rise and trade becomes less impeded. I also show that a developed country that has some unskilled labor -intensive blocks outsourced abroad may not experience a fall in the unskilled wage rate.