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Agglomeration, Offshoring and Heterogenous Firms

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  • Baldwin, Richard
  • Okubo, Toshihiro

Abstract

Recent trade models determine the equilibrium distribution of firm-level efficiency endogenously and show that freer trade shifts the distribution towards higher average productivity due to entry and exit of firms. These models ignore the possibility that freer trade also alters the firm-size distribution via international firm migration (offshoring); firms must, by assumption, produce in their 'birth nation.' We show that when firms are allowed to switch locations, new productivity effects arise. Freer trade induces the most efficient small-nation firms to move to the large nation. The big country gets an 'extra helping' of the most efficient firms while the small nation's firm-size distribution is truncated on both ends. This reinforces the big-nation productivity gain while reducing or even reversing the small-nation productivity gain. The small nation is nevertheless better off allowing firm migration.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5663.

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Date of creation: May 2006
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Handle: RePEc:cpr:ceprdp:5663

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Related research

Keywords: delocation; economic geography; heterogenous firms; hollowing-out; offshoring; productivity effects;

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References

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  1. Mark J. Melitz, 2002. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," NBER Working Papers 8881, National Bureau of Economic Research, Inc.
  2. Marc J. Melitz & Gianmarco I.P. Ottaviano, 2005. "Market Size, Trade, and Productivity," Development Working Papers 201, Centro Studi Luca d\'Agliano, University of Milano.
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  4. Andrew B. Bernard & Stephen J. Redding & Peter K. Schott, 2007. "Comparative Advantage and Heterogeneous Firms," Review of Economic Studies, Oxford University Press, vol. 74(1), pages 31-66.
  5. Elhanan Helpman & Marc J. Melitz & Stephen R. Yeaple, 2004. "Export Versus FDI with Heterogeneous Firms," American Economic Review, American Economic Association, vol. 94(1), pages 300-316, March.
  6. Masahisa Fujita & Paul Krugman & Anthony J. Venables, 2001. "The Spatial Economy: Cities, Regions, and International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262561476, January.
  7. Jonathan Eaton & Samuel Kortum, 2002. "Technology, Geography, and Trade," Econometrica, Econometric Society, vol. 70(5), pages 1741-1779, September.
  8. Jonathan Eaton & Samuel Kortum & Francis Kramarz, 2004. "Dissecting trade: firms, industries, and export destinations," Staff Report 332, Federal Reserve Bank of Minneapolis.
  9. Richard Baldwin & Toshihiro Okubo, 2005. "Heterogeneous Firms, Agglomeration and Economic Geography: Spatial Selection and Sorting," NBER Working Papers 11650, National Bureau of Economic Research, Inc.
  10. Paul Krugman, 1990. "Increasing Returns and Economic Geography," NBER Working Papers 3275, National Bureau of Economic Research, Inc.
  11. Bee Yan Aw & Sukkyun Chung & Mark J. Roberts, 1998. "Productivity and the Decision to Export: Micro Evidence from Taiwan and South Korea," NBER Working Papers 6558, National Bureau of Economic Research, Inc.
  12. Martin, Philippe & Rogers, Carol Ann, 1994. "Industrial Location and Public Infrastructure," CEPR Discussion Papers 909, C.E.P.R. Discussion Papers.
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Citations

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Cited by:
  1. Ali-Yrkkö, Jyrki & Deschryvere, Matthias, 2008. "Domestic R&D Employment Effects of Offshoring R&D Tasks: Some Empirical Evidence from Finland," Discussion Papers 1163, The Research Institute of the Finnish Economy.
  2. Richard E. Baldwin & Toshihiro Okubo, 2005. "Tax reform, delocation and heterogeneous firms: Base widening and rate lowering rule," Discussion Paper Series 222, Research Institute for Economics & Business Administration, Kobe University, revised May 2008.
  3. Baldwin, Richard & Okubo, Toshihiro, 2008. "Tax Reform, Delocation and Heterogeneous Firms: Base Widening and Rate Lowering Reforms," CEPR Discussion Papers 6843, C.E.P.R. Discussion Papers.
  4. Toshihiro Okubo, 2009. "Firm heterogeneity and Ricardian comparative advantage within and across sectors," Economic Theory, Springer, vol. 38(3), pages 533-559, March.
  5. Toshihiro Okubo, 2006. "Trade Liberalisation and Agglomeration with Firm Heterogeneity - Forward and Backward Linkages," IHEID Working Papers 17-2006, Economics Section, The Graduate Institute of International Studies.
  6. Sun, Churen & Yu, Zhihao & Zhang, Tao, 2012. "Agglomeration and Trade with Heterogeneous Firms," MPRA Paper 49001, University Library of Munich, Germany, revised 17 Aug 2013.
  7. Richard Baldwin & Toshihiro Okubo, 2009. "Tax reform, delocation and heterogeneous firms," NBER Working Papers 15109, National Bureau of Economic Research, Inc.
  8. Maria Florencia Granato, 2011. "REGIONAL NEW ECONOMIC GEOGRAPHY (refereed paper)," ERSA conference papers ersa10p747, European Regional Science Association.
  9. Richard Baldwin & Toshihiro Okubo, 2012. "International Trade, Offshoring and Heterogeneous Firms," Keio/Kyoto Joint Global COE Discussion Paper Series 2012-014, Keio/Kyoto Joint Global COE Program.
  10. Jang Ping Thia, 2008. "Why Capital does not Migrate to the South: A New Economic Geography Perspective," CEP Discussion Papers dp0895, Centre for Economic Performance, LSE.
  11. Hea-Jung Hyun, 2009. "Firm Heterogeneity in the Choice of Offshoring : Evidence from Korean Manufacturing Firms," Microeconomics Working Papers 22991, East Asian Bureau of Economic Research.

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