The Impact of Outsourcing on the Japanese Economy
Chapter 2: International Fragmentation of Production: A Survey of Theory and the Measurement Issue
INTRODUCTION 2.1 Until recently, international trade theory was dominated by the traditional notion of a horizontal specialization where goods were produced entirely from start to finish in one country and only completed goods were exchanged between countries. This notion has become increasingly inappropriate due to the increasing importance of fragmentation trade under which countries can specialize in different stages of the production process of a given product. While the doctrine of comparative advantage still offers a useful conceptual framework, the increasingly complex nature of fragmentation trade warrants a new analytical paradigm that goes beyond comparative advantage (Grossman and Rossi-Hansberg, 2008). In response, a sizable body of theoretical literature has emerged that puts forward the viewpoint of the neoclassical trade theory and industrial organization arising from the pioneering work of Jones and Kierzkowski (1990). The objective of this chapter is two-fold. The first is to provide a comprehensive interpretative survey of the theoretical literature, with emphasis on the determinants and the labour market implications of production fragmentation. This is done in order to place the ensuing empirical approach into the appropriate context and justify the methodological approach. The discussions are also drawn from the business management literature in order to obtain some sense of reality. The second objective is to discuss alternative approaches to the measurement of fragmentation trade. Despite the proliferation of theoretical research, empirical research has lagged behind due to the absence of readily available data relating to fragmentation trade. In applied work three different measures of fragmentation trade...
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