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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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  • Stähler, Frank
  • Raff, Horst
  • Long, Ngo Van

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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Bibliographic Info

Paper provided by Christian-Albrechts-University of Kiel, Department of Economics in its series Economics Working Papers with number 2007,20.

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Date of creation: 2007
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Handle: RePEc:zbw:cauewp:5686

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

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Citations

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Cited by:
  1. Nicolas Coeurdacier & Roberto A. de Santis & Antonin Aviat, 2009. "Cross-border mergers and acquisitions and European integration," Sciences Po publications info:hdl:2441/c8dmi8nm4pd, Sciences Po.
  2. Itai Agur, 2010. "Trade Liberalization, Firm Selection, and Variety Growth," Review of International Economics, Wiley Blackwell, vol. 18(3), pages 582-594, 08.
  3. Michele Imbruno, 2008. "EXPORTING, PRODUCTIVITY AND MARKET INTEGRATON: Italian manufacturing firms within the European context," Quaderni DSEMS, Dipartimento di Scienze Economiche, Matematiche e Statistiche, Universita' di Foggia 22-2008, Dipartimento di Scienze Economiche, Matematiche e Statistiche, Universita' di Foggia.
  4. Crespo, Aranzazu, 2012. "Trade, Innovation and Productivity: A Quantitative Analysis of Europe," MPRA Paper 57162, University Library of Munich, Germany.
  5. Anderson, Kym & Lattimore, Ralph G. & Lloyd, Peter J. & MacLaren, Donald, 2007. "Distortions to Agricultural Incentives in Australia and New Zealand," 2007 Conference (51st), February 13-16, 2007, Queenstown, New Zealand, Australian Agricultural and Resource Economics Society 10407, Australian Agricultural and Resource Economics Society.

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