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Infant Industry Protection and Industrial Dynamics

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  • Ederington, Josh
  • McCalman, Phillip

Abstract

A perennial case for industrial policy is based on the protection of young or emerging industries. Despite a natural association with concepts of life cycles, industrial policy has not been analyzed in the context of an industry life-cycle model. In particular, an important life-cycle characteristic, the potential for very large changes in the rate of net entry, is ignored. In this paper, we demonstrate how the impact of industrial policy depends critically on the entry and exit dynamics within an industry. In particular, we construct a model of technology adoption in which the number of firms is endogenous, and derive a set of novel predictions about the effects of protection on firm technology decisions. Specifically, we show that permanent protection can induce earlier adoption, but also decreases the probability that a given firm adopts the new technology. Likewise, we demonstrate that reducing the duration of protection results in faster adoption than permanent protection, but also reduces a given firms probability of adoption. Finally, we show that, for industries characterized by flexibility in firm numbers, protection does not change the rate of technology adoption but does increase the size and probability of a shakeout (large scale net exit).

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 22361.

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Date of creation: Oct 2009
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Handle: RePEc:pra:mprapa:22361

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Keywords: GATT/WTO; Trade Policy; Trade and Firm Productivity;

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  1. Crowley, Meredith A., 2006. "Do safeguard tariffs and antidumping duties open or close technology gaps?," Journal of International Economics, Elsevier, Elsevier, vol. 68(2), pages 469-484, March.
  2. Miyagiwa, Kaz & Ohno, Yuka, 1999. "Credibility of Protection and Incentives to Innovate," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(1), pages 143-63, February.
  3. Reinganum, Jennifer F, 1981. "On the Diffusion of New Technology: A Game Theoretic Approach," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 48(3), pages 395-405, July.
  4. Andrew B. Bernard & Jonathan Eaton & J. Bradford Jenson & Samuel Kortum, 2000. "Plants and Productivity in International Trade," NBER Working Papers 7688, National Bureau of Economic Research, Inc.
  5. 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.
  6. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, Econometric Society, vol. 71(6), pages 1695-1725, November.
  7. Miyagiwa, K. & Ohno, Y., 1993. "Closing the Technology Gap Under Protection," Working Papers, University of Washington, Department of Economics 93-09, University of Washington, Department of Economics.
  8. Gort, Michael & Klepper, Steven, 1982. "Time Paths in the Diffusion of Product Innovations," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 92(367), pages 630-53, September.
  9. Howard Pack & Kamal Saggi, 2006. "Is There a Case for Industrial Policy? A Critical Survey," World Bank Research Observer, World Bank Group, World Bank Group, vol. 21(2), pages 267-297.
  10. Georg GÖTZ, 1996. "Monopolistic Competition and the Diffusion of New Technology," Vienna Economics Papers, University of Vienna, Department of Economics vie9610, University of Vienna, Department of Economics.
  11. Ederington, Josh & McCalman, Phillip, 2008. "Endogenous firm heterogeneity and the dynamics of trade liberalization," Journal of International Economics, Elsevier, Elsevier, vol. 74(2), pages 422-440, March.
  12. Ping Lin & Kamal Saggi, 1999. "Incentives for Foreign Direct Investment under Imitation," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 32(5), pages 1275-1298, November.
  13. Josh Ederington & Phillip McCalman, 2009. "International Trade And Industrial Dynamics," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(3), pages 961-989, 08.
  14. Kiminori Matsuyama, 1987. "Perfect Equilibria in a Trade Liberalization Game," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 738, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  15. Josh Ederington & Phillip McCalman, 2007. "The Impact of Trade Liberalization on Productivity Within and Across Industries: Theory and Evidence," Development Research Unit Working Paper Series, Monash University, Department of Economics 24-07, Monash University, Department of Economics.
  16. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, American Economic Association, vol. 70(5), pages 950-59, December.
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