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Globalization and the Evolution of the Supply Chain: who gains and who loses?

Discussion Papers

No.005

by FUJITA Masahisa and Jacques-Francois Thisse
August 2004

ABSTRACT

This paper focuses on two distinct facets of globalization: the decrease in the trade costs of goods and the decline of communication costs between headquarters and production facilities within firms.

When the unskilled have about the same wage in the two regions, the decrease of these costs fosters the gradual agglomeration of plants in the core region accommodating the headquarters. By contrast, when the wage gap is significant, the process of integration eventually triggers the re-location of plants into the periphery. In particular, when the process of re-location is driven by falling communication costs, the welfare of all workers living in the core goes down whereas the welfare of those who reside in the periphery rises.

Keywords: information technologies, communication costs, agglomeration, headquarters, plants, supply chain, re-location
JEL classification: F12, L13, R13

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