Firm integration strategies and imperfect labour markets

This paper introduces labour market imperfections into a three‐country model to study the determinants of firm integration strategies in an open economy. Accounting simultaneously for the decision upon in‐house production versus international outsourcing and the decision upon exporting versus horizontal foreign investment, the analysis points to a crucial role of labour market frictions for the interaction of vertical and horizontal aspects of firm integration strategies in a general equilibrium environment. Beyond that, the analysis sheds light on the consequences of integrating developing countries into the global market, thereby pointing to hitherto unexplored effects arising from adjustments of firm integration strategies. In a welfare analysis, we show that the existence of gains from trade crucially depends on whether firm integration strategies are endogenous or not.