(De)industrialization, technology and transportation

Abstract

The transition from a traditional, constant returns technology to modern, increasing returns methods of production in manufacturing not only widens the scale of production but more crucially, it enhances product quality. Such a quality improvement consists mainly in a much higher level of transportability. The fact that products become “lighter” and easier to carry opens foreign markets to manufacturers thereby supporting larger scales of production. We model this situation through a one-stage game where firms distributed across two countries select technologies and fob mill prices. Contrasting with the Big Push approach, such a game is never a coordination game. In addition to cases where all firms adopt either modern or traditional technologies, the standard outcome is an asymmetric situation, where the modern firms in a country eliminate traditional units in the other country. Starting from a situation where all productive activity is traditional, deindustrialization can be viewed as a situation where firms in a country switch to more modern technologies while industrial units in the other country are unable to participate in this movement.