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Trade Liberalization, Competition and Growth

Listed author(s):
  • Omar Licandro
  • Antonio Navas

Increasing evidence support the claim that international trade enhances innovation and productivity growth through an increase in competition. This paper develops a two-country endogenous growth model, with firm specific R&D and a continuum of oligopolistic sectors under Cournot competition to providea theoretica lsupport to this claim. Since countries are assumed to produce the same set of varieties,trade openness makes markets more competitive, reducing prices and increasing quantities. Under Cournot competition, trade is pro-competitive. Since firms undertake cost reducing innovations, the increase in production induced by a more competitive market push firms to innovate more. Consequently, a reduction on trade barriers enhances growth by reducing domestic firm's market power.

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File URL: http://www.barcelonagse.eu/sites/default/files/working_paper_pdfs/436.pdf
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Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 436.

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Date of creation: Feb 2010
Handle: RePEc:bge:wpaper:436
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