This paper analyses the impact of trade liberalization in a model where heterogeneous firms can freely offshore their production. Firms choose whether to produce, and if so whether to sell on the domestic market only or on the export market as well. Simultaneously, they also choose where to locate their production. The paper shows that the interaction between heterogeneity in firm productivity and the possibility of offshoring production dramatically alters the impact of trade liberalization. Three main results emerge from this interaction: i) Intra-industry factor reallocation towards the most productive firms, which is induced by trade liberalization, operates at the world level, but not necessarily at the country level and thus trade liberalization can lead to average productivity losses in some countries; ii) Trade liberalization may reverse country specialization independently of any country size effect; iii) The relation between trade liberalization and trade growth is non-linear, even in the absence of trade in intermediate goods.
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Paper provided by European University Institute in its series Economics Working Papers with number
ECO2009/26.
Length: Date of creation: 2009 Date of revision: Handle: RePEc:eui:euiwps:eco2009/26
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Find related papers by JEL classification: F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies F15 - International Economics - - Trade - - - Economic Integration R30 - Urban, Rural, and Regional Economics - - Production Analysis and Firm Location - - - General
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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[Downloadable!] (restricted)
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NBER Working Papers
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[Downloadable!] (restricted)
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[Downloadable!]