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Globalization, Increasing Returns in Component Production, and the Pattern of Trade

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Author Info
Anu Kovarikova Arro

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Abstract

This paper proposes that globalization, through the enlargement of the market, can influence both specialization and the equilibrium firm size. By re-introducing two factors of production into the muchutilized Dixit-Stiglitz-Ethier framework, I show that gains from specialization depend only on capital, while gains from increasing firm size face a trade-off between labor and capital as the size of the market expands. If the markup that the firms charge is instead endogenously determined, I demonstrate how firms can gain from both internal and external economies as globalization occurs if the number of firms stays under a specified threshold. The paper also shows that opening up to free trade in intermediate inputs and a final consumption good will have relative endowments determining the direction of trade across the stages of production. The model predicts that a relatively capital-abundant country will be the importer of the final good and the net exporter of intermediate components. Compared to autarky, trade will enhance specialization and firm size in the capital-abundant country and diminish both in the laborabundant country. Welfare can either increase or decrease as a result of trade.

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Publisher Info
Paper provided by The Center for Economic Research and Graduate Education - Economic Institute, Prague in its series CERGE-EI Working Papers with number wp265.

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Date of creation: Jun 2005
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Handle: RePEc:cer:papers:wp265

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Related research
Keywords: Monopolistic competition; external and internal economies of scale; trade across the stages of production.;

Find related papers by JEL classification:
F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies
L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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