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International trade and competitiveness

  • Armando Garcia Pires

    ()

We analyze the role of international market size differences in determining the investment in process R&D (and thus firms’ competitiveness) in a trade model with oligopolistic market structure, non-homothetic production technology and costly trade. We show that the R&D effort is higher (or even disproportionately so) for firms in the larger market, which causes endogenous asymmetries across countries. As a result, firms in the larger market have higher competitiveness, which increases their market shares in international markets. Furthermore, and contrary to what is predicted by Krugman (Am Econ Rev 70:950–959, 1980 ) “home market effect”, in equilibrium the larger country does not need to host a disproportionately higher share of the world’s industry than of the world’s demand. Despite this, the larger country can still continue to run a trade surplus in the oligopolistic sector, since it hosts firms with higher competitiveness than firms in the smaller country. Copyright Springer-Verlag 2012

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File URL: http://hdl.handle.net/10.1007/s00199-010-0586-2
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Article provided by Springer & Society for the Advancement of Economic Theory (SAET) in its journal Economic Theory.

Volume (Year): 50 (2012)
Issue (Month): 3 (August)
Pages: 727-763

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Handle: RePEc:spr:joecth:v:50:y:2012:i:3:p:727-763
DOI: 10.1007/s00199-010-0586-2
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