IDEAS home Printed from https://ideas.repec.org/p/cer/papers/wp265.html
   My bibliography  Save this paper

Globalization, Increasing Returns in Component Production, and the Pattern of Trade

Author

Listed:
  • Anu Kovarikova Arro

Abstract

This paper proposes that globalization, through the enlargement of the market, can influence both specialization and the equilibrium firm size. By re-introducing two factors of production into the muchutilized Dixit-Stiglitz-Ethier framework, I show that gains from specialization depend only on capital, while gains from increasing firm size face a trade-off between labor and capital as the size of the market expands. If the markup that the firms charge is instead endogenously determined, I demonstrate how firms can gain from both internal and external economies as globalization occurs if the number of firms stays under a specified threshold. The paper also shows that opening up to free trade in intermediate inputs and a final consumption good will have relative endowments determining the direction of trade across the stages of production. The model predicts that a relatively capital-abundant country will be the importer of the final good and the net exporter of intermediate components. Compared to autarky, trade will enhance specialization and firm size in the capital-abundant country and diminish both in the laborabundant country. Welfare can either increase or decrease as a result of trade.

Suggested Citation

  • Anu Kovarikova Arro, 2005. "Globalization, Increasing Returns in Component Production, and the Pattern of Trade," CERGE-EI Working Papers wp265, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
  • Handle: RePEc:cer:papers:wp265
    as

    Download full text from publisher

    File URL: http://www.cerge-ei.cz/pdf/wp/Wp265.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Markusen, James & Rutherford, Thomas F. & Tarr, David, 2000. "Foreign direct investment in services and the domestic market for expertise," Policy Research Working Paper Series 2413, The World Bank.
    2. Gordon H. Hanson & Raymond J. Mataloni & Matthew J. Slaughter, 2005. "Vertical Production Networks in Multinational Firms," The Review of Economics and Statistics, MIT Press, vol. 87(4), pages 664-678, November.
    3. Gene M. Grossman & Elhanan Helpman, 2005. "Outsourcing in a Global Economy," Review of Economic Studies, Oxford University Press, vol. 72(1), pages 135-159.
    4. d'Aspremont, Claude & Dos Santos Ferreira, Rodolphe & Gerard-Varet, Louis-Andre, 1996. "On the Dixit-Stiglitz Model of Monopolistic Competition," American Economic Review, American Economic Association, vol. 86(3), pages 623-629, June.
    5. Simon Evenett, 2004. "The Cross-Border Mergers and Acquisitions Wave of the Late 1990s," NBER Chapters,in: Challenges to Globalization: Analyzing the Economics, pages 411-470 National Bureau of Economic Research, Inc.
    6. Yang, Xiaokai & Heijdra, Ben J, 1993. "Monopolistic Competition and Optimum Product Diversity: Comment," American Economic Review, American Economic Association, vol. 83(1), pages 295-301, March.
    7. Raphael Bergoeing & Timothy J. Kehoe & Vanessa Strauss-Kahn & Kei-Mu Yi, 2004. "Why Is Manufacturing Trade Rising Even as Manufacturing Output is Falling?," American Economic Review, American Economic Association, vol. 94(2), pages 134-138, May.
    8. Eckel, Carsten, 2008. "Globalization and specialization," Journal of International Economics, Elsevier, vol. 75(1), pages 219-228, May.
    9. Venables, Anthony J., 1996. "Trade policy, cumulative causation, and industrial development," Journal of Development Economics, Elsevier, vol. 49(1), pages 179-197, April.
    10. Pak-Wai Liu & Xiaokai Yang, 2006. "The Theory Of Irrelevance Of The Size Of The Firm," World Scientific Book Chapters,in: Inframarginal Contributions To Development Economics, chapter 11, pages 259-290 World Scientific Publishing Co. Pte. Ltd..
    11. Rivera-Batiz, Francisco L. & Rivera-Batiz, Luis A., 1990. "The effects of direct foreign investment in the presence of increasing returns due to specialization," Journal of Development Economics, Elsevier, vol. 34(1-2), pages 287-307, November.
    12. Egger, Hartmut & Egger, Peter, 2001. "Cross-border sourcing and outward processing in EU manufacturing," The North American Journal of Economics and Finance, Elsevier, vol. 12(3), pages 243-256, November.
    13. Batra, Raveendra N & Casas, Francisco R, 1973. "Intermediate Products and the Pure Theory of International Trade: A Neo-Heckscher-Ohlin Framework," American Economic Review, American Economic Association, vol. 63(3), pages 297-311, June.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Monopolistic competition; external and internal economies of scale; trade across the stages of production.;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cer:papers:wp265. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jana Koudelkova). General contact details of provider: http://edirc.repec.org/data/eiacacz.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.