Vertical Specialization Across Developed Countries

This article explains why a large part of vertical specialization in production takes place across developed countries. By introducing the concept “the Ideal Intermediate Good” it is shown that there are incentives for vertical collaboration between an intermediate good producer and a final good producer. The purpose of locating the intermediate good production in an identical host country is to come closer to the most suitable intermediate good. Thereby the variable costs in the final good production are reduced. When the final good production takes place in one company, we have a vertical integrated multinational enterprise, which splits its production across identical countries. By inclusion of internal economies of scale and transport costs the problem becomes much more complex, and a reallocation of welfare between the countries can be the result.