International Outsourcing and Factor Prices with Multistage Production

We develop a dual representation of the technology of international fragmentation for an industry using 2 factors in a continuum of stages. We then derive a generalised factor price frontier which incorporates an endogenous adjustment of the margin fragmentation. Using this frontier in a 2×2 general equilibrium model, we investigate the role of outsourcing in the adjustment to a decline in the final output price of the multistage industry, and the attendant factor price effects. We also explore the implications of an improved technology of international fragmentation on the margin of fragmentation and on domestic factor prices. Pagehead title: International Outsourcing and factor prices JEL Code: D33, F11, F15, F23 Address: Altenberger Strasse 69, A-4040 LINZ-AUHOF. Phone: 0043-732-2468-8239, FAX: — 8238, E-mail: [email protected], Web: http://www.economics.uni-linz.ac.at/kohler (#): This is a revised version of a paper entitled “Factor price Frontiers with International Fragmentation of Multistage Production”, Research Paper 2003/16, Leverhulme Centre for Research on Globalisation and Economic Activity (GEP), University of Nottingham. Thanks are due to Gabriel Felbermayr for detailed and very helpful comments. The work has been conducted under a research grant from the Austrian Science Fund, no. P14702, entitled: "Public Finance, Unemployment and Growth".