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Trade and growth with heterogeneous firms

  • Robert Baldwin
  • Frédéric Robert-Nicoud

This paper explores the impact of trade on growth when firms are heterogeneous. We find that greater openness produces anti-and pro-growth effects. The Melitz-model selection effects raises the expected cost of introducing a new variety and this tends to slow the rate of new-variety introduction and hence growth. The pro-growth effect stems from the impact that freer trade has on the marginal cost of innovating. The balance of the two effects is ambiguous with the sign depending upon the exact nature of the innovation technology and its connection to international trade in goods and ideas. We consider five special cases (these include the Grossman-Helpman, the Coe- Helpman and Rivera-Batiz-Romer models) two of which suggest that trade harms growth; the others predicting the opposite.

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File URL: http://eprints.lse.ac.uk/19856/
File Function: Open access version.
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Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 19856.

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Length: 26 pages
Date of creation: Jun 2006
Date of revision:
Handle: RePEc:ehl:lserod:19856
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Web page: http://www.lse.ac.uk/

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