International fragmentation and the new economic geography

Fragmentation of vertically integrated production processes implies that segments (production blocks) are located in different geographical areas, perhaps in different countries, and that they may be undertaken by different firms. Service links are required to coordinate such fragmentation, and it is in these links (such as communication and transportation) that significant economies of scale are to be found. This often leads to dis-agglomeration of economic activity, especially at the international level, which runs counter to suggestions found in the “new economic geography” literature. This paper explores the implications of increasing returns in service links for fragmentation and the dispersion of production.