plant is small compared to the cost of establishing a firm with local plant. Fragmentation and skilled-labor intensity motivate vertical MNEs, while jointness is associated with horizontal MNEs. It should be noted that fragmentation and jointness are not the same thing. Fragmentation can be interpreted as service provided by skilled labor, such as manager service. Manager skill can be transferred easily by shifting a manager from home to host, but cannot be simultaneously used in both because a manager can only be in one place at any one time. On the other hand, jointness, which can be represented by a blueprint, can easily be shared among plants without reducing the services provided in other locations. Model Structure There are two identical countries, denoted by and producing two final goods using i j, two factors, unskilled labor and skilled labor and are required in both sectors L S. L S and are mobile between sectors, but are internationally immobile. is produced with and a Cobb-Douglas type constant return to scale Y L S technology and under perfect competition. will be used as numeraire and so its price is Y set to unity. The production function for is: Y , (1) where and are skilled and unskilled labor used in the sector in country Subscripts Y i. i and will respectively be used to denote countries 1 and 2. Marginal products of and j S L in production are: Y and , (2) and are wages for skilled and unskilled labor, respectively. Good is produced with increasing returns to scale technology by imperfectly X competitive Cournot firms. is produced in two stages. In the first stage, the X intermediate product is produced only in country using skilled labor alone. In the M i S
plant is small compared to the cost of establishing a firm with local plant. Fragmentation and skilled-labor intensity motivate vertical MNEs, while jointness is associated with horizontal MNEs. It should be noted that fragmentation and jointness are not the same thing. Fragmentation can be interpreted as service provided by skilled labor, such as manager service. Manager skill can be transferred easily by shifting a manager from home to host, but cannot be simultaneously used in both because a manager can only be in one place at any one time. On the other hand, jointness, which can be represented by a blueprint, can easily be shared among plants without reducing the services provided in other locations. Model Structure There are two identical countries, denoted by i and j, producing two final goods using two factors, unskilled labor L and skilled labor S. L and S are required in both sectors and are mobile between sectors, but are internationally immobile. Y is produced with L and S a Cobb-Douglas type constant return to scale technology and under perfect competition. Y will be used as numeraire and so its price is set to unity. The production function for Y is: , (1) where and are skilled and unskilled labor used in the Y sector in country i. Subscripts i and j will respectively be used to denote countries 1 and 2. Marginal products of S and L in Y production are: and , (2) and are wages for skilled and unskilled labor, respectively. Good X is produced with increasing returns to scale technology by imperfectly competitive Cournot firms. X is produced in two stages. In the first stage, the intermediate product M is produced only in country i using skilled labor S alone. In the
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