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The Effects of Trade Liberalization on Productivity and Welfare: The Role of Firm Heterogeneity, R&D and Market Structure

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Author Info

  • Ngo Van Long

    ()
    (Department of Economics, McGill University, Montreal)

  • Horst Raff

    ()
    (Department of Economics, University of Kiel)

  • Frank Staehler

    ()
    (Department of Economics, University of Otago)

Abstract

This paper develops an oligopolistic model of international trade with heterogeneous firms and endogenous R&D to examine how trade liberalization affects firm and industry productivity, as well as social welfare. We identify four effects of trade liberalization on productivity: (i) a direct effect through changes in R&D investment; (ii) a scale effect due to changes in firm size; (iii) a selection effect due to inefficient firms leaving the market; and (iv) a market-share reallocation effect as efficient firms expand and inefficient firms reduce their output. We show how these effects operate in the short run when market structure is fixed, and in the long run when market structure is endogenous. Among the robust results that hold for any market structure are that trade liberalization (i) increases (decreases) aggregate R&D for low (high) trade costs; (ii) increases expected firm size if trade costs are high; and (iii) raises expected social welfare if trade costs are low.

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File URL: http://www.business.otago.ac.nz/econ/research/discussionpapers/DP_0710.pdf
File Function: First version, 2007
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Bibliographic Info

Paper provided by University of Otago, Department of Economics in its series Working Papers with number 0710.

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Length: 29 pages
Date of creation: Jun 2007
Date of revision: Jun 2007
Handle: RePEc:otg:wpaper:0710

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Keywords: international trade; firm heterogeneity; R&D; productivity; market structure;

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References

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Citations

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Cited by:
  1. Itai Agur, 2010. "Trade Liberalization, Firm Selection, and Variety Growth," Review of International Economics, Wiley Blackwell, vol. 18(3), pages 582-594, 08.
  2. Anderson, Kym & Lattimore, Ralph G. & Lloyd, Peter J. & MacLaren, Donald, 2008. "Distortions to Agricultural Incentives in Australia and New Zealand," Agricultural Distortions Working Paper 48387, World Bank.
  3. Antonin Aviat & Roberto A. de Santis & Nicolas Coeurdacier, 2009. "Cross-border mergers and acquisitions and European integration," Sciences Po publications info:hdl:2441/c8dmi8nm4pd, Sciences Po.
  4. Michele Imbruno, 2008. "EXPORTING, PRODUCTIVITY AND MARKET INTEGRATON: Italian manufacturing firms within the European context," Quaderni DSEMS 22-2008, Dipartimento di Scienze Economiche, Matematiche e Statistiche, Universita' di Foggia.

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