Differentiation, labor market and globalization

Abstract

We consider two countries with initially one firm in each country and the possibility for each firm to invest in the other country or commercialize its products, and for workers to immigrate (Common Labor Market; CLM). Interestingly, when firms compete on the product market with no competition on the labor market (Goods’ Mobility; GM), they do not differentiate their qualities. However, when competition is introduced in both markets (Foreign Investment; FI) firms differentiate their products. We compare the globalization scenarii and prove that they improve the global social welfare relative to autarky and that a cooperative choice by countries of a globalization scenario would lead to GM.

Keywords:

• Vertical differentiation
• labor market
• globalization
• foreign investment
• common labor market
• goods’ mobility

JEL Classifications:

• F2
• F12
• J4
• L13

Acknowledgments

Authors are grateful to Didier Laussel for his helpful comments and suggestions. Amal Hili gratefully acknowledges the financial support to present this paper at the ETSG Conference, from the World Trade Organization Chair at Tunis Business School.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. As De Fraja (1999).

2. This assumption could be warranted by the OECD’s report (2010) according to which intra-industry trade is likely to occur among countries having similar development levels and economic structures.

3. Motta (1992) introducing in addition sunk costs, proves that losses may arise from liberalization.

4. We thank one of the referees for his interesting remark.

5. In which Firms i and j play the reverse roles.