International Relocation, Difference in Production Costs, and Welfare: Analysis Based on the Two-Country Model

After the 1990s, many Japanese enterprises shifted their production locations abroad. The principal reason behind their international relocation was the rapid emergence of developing countries producing goods at low costs (wages and the price of nontradable goods), which was accompanied by productivity improvement. In this paper, we develop a two-country model analyzing the effects of a productivity shock in the foreign nontradable sector on the macroeconomies of both the home country and the foreign country. As a result, we show that such productivity improvement not only induces enterprise relocation from the home country to the foreign country but also improves the economic welfare of both countries, particularly that of the home country. Therefore, although the productivity improvement in the foreign country relocates the production activities of firms to the foreign countries, it possibly brings about desirable results for the Japanese economy.