Relocating the value chain: off-shoring and agglomeration in the global economy

Fragmentation of stages of the production process is determined by international cost differences and by the benefits of co-location of related stages.� The interaction between these forces depends on the technological relationships between these stages.� This paper looks at both cost minimising and equilibrium fragmentation under different technological configurations.� Reductions in trade costs beyond a threshold can result in discontinuous changes in location, with relocation of a wide range of production stages.� There can be overshooting (off-shoring that is reversed as costs fall further) and equilibrium may involve less off-shoring than is efficient.Fragmentation, Off-shoring, Parts and components, Assembly, Vertical linkages, Agglomeration