A Framework for Fragmentation

Abstract

The word fragmentation refers to a splitting up of a verticallyintegrated production process such that the separatefragments can be traded on markets. This paper is concerned withinternational fragmentation, generally allowing gainsfrom a finer division of labor based on comparative advantage inseparate fragments. A discussion of how growth inoutput can encourage fragmentation because of the increasing returnsnature of the service links required to coordinateseparate production blocks, and how drastic reductions in the costsof these service links also encourages fragmentation isfollowed by a focus on internal income distribution. It is shownthat a country that loses a labor-intensive fragment of aprocess to international competition following a reduction in costsof service links may find its real wage rising. This isespecially possible in more capital-abundant countries