Firm Heterogeneity and FDI with Matching Frictions
AbstractFirm-level data often show different modes of market access by firms with the same productivity levels, which is a mere knife-edge case in the basic firm heterogeneity model. This paper examines the foreign direct investment decisions of individual firms with a simple framework where firms and managers have to make matches for production. We find that predicted distributions of FDI firms are much more akin to real data than those suggested by the basic firm heterogeneity model and that sorting by firms' productivities becomes less sharp when either matching frictions increase or trade costs decline. Furthermore, matching frictions hurt production efficiency more for productive FDI firms than for less productive FDI firms.
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Bibliographic InfoPaper provided by Research Institute of Economy, Trade and Industry (RIETI) in its series Discussion papers with number 09025.
Length: 23 pages
Date of creation: Jun 2009
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