Firm integration strategies and imperfect labor markets‡ Hartmut Egger§

This paper introduces labor market imperfections into a three country model to study the determinants of firm integration strategies in an open economy. Accounting simultaneously for the decision upon in-house production versus outsourcing and the decision upon exporting versus horizontal foreign invest-ment, the analysis points to a crucial role of labor market frictions for the com-plex vertical and horizontal aspects in the integration strategies of international producers. Within this setting, we also show how changes in firm integration affect domestic labor markets and welfare in industrialized economies. Beyond that, the analysis discloses potential conflicts of interest between northern and southern economies when firms adjust their integration strategies in the process of trade liberalizaton. JEL-Classification: F12, F16, F2