Barriers to Firm Growth in Open Economies
AbstractThe international trade literature finds strong links between firm growth and export decisions. In spite of this, the literature analyzing cross-country differences in firm growth commonly abstracts from trade. We develop a tractable, dynamic model to understand the consequences of this abstraction. We find that the closed economy (i) under-estimates domestic (firm) growth barriers, potentially modifying the rankings across countries; and (ii) over-predicts the effects of counterfactuals. To asses the quantitative relevance of these findings, we calibrate the model to a set of European countries. The model successfully captures differences in value added per worker, accounting for between 54 and 87% of the differences across countries. We find that a closed economy alters the ranking of countries according to the size of these barriers and over-predicts the effects of counterfactuals on welfare by between 31 and 64% relative to the open economy. Thus, trade is essential for measuring barriers to firm growth and their counterfactuals in open economies.
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Bibliographic InfoPaper provided by Einaudi Institute for Economics and Finance (EIEF) in its series EIEF Working Papers Series with number 1304.
Length: 53 pages
Date of creation: 2013
Date of revision: Mar 2013
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-03-30 (All new papers)
- NEP-BEC-2013-03-30 (Business Economics)
- NEP-DGE-2013-03-30 (Dynamic General Equilibrium)
- NEP-OPM-2013-03-30 (Open Economy Macroeconomic)
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