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Trade Liberalization and Firm Dynamics

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  • Ariel Burstein
  • Marc J. Melitz

Abstract

In this paper, we analyze the transition dynamics associated with an economy's response to trade liberalization. We start by reviewing the recent literature that incorporates firm dynamics into models of international trade. We then build upon that literature to characterize the role of firm dynamics, export-market selection, firm-level innovation, sunk export costs, and firms' expectations regarding the time path of liberalization in generating those transition dynamics following trade liberalization. These modeling ingredients generate substantial aggregate transition dynamics as they shift and shape the endogenous distribution of firms over time. Our results show how the responses of trade volumes, innovation, and aggregate output can vary greatly over time depending on those modeling ingredients. This has important consequences for many issues in international economics that rely on predictions for the effects of globalization over time on those key aggregate outcomes.

Suggested Citation

  • Ariel Burstein & Marc J. Melitz, 2011. "Trade Liberalization and Firm Dynamics," NBER Working Papers 16960, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:16960
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    File URL: http://www.nber.org/papers/w16960.pdf
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    References listed on IDEAS

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    1. Navas-Ruiz, Antonio & Sala, Davide, 2007. "Technology adoption and the selection effect of trade," UC3M Working papers. Economics we076737, Universidad Carlos III de Madrid. Departamento de Economía.
    2. Long, Ngo Van & Raff, Horst & Stähler, Frank, 2011. "Innovation and trade with heterogeneous firms," Journal of International Economics, Elsevier, vol. 84(2), pages 149-159, July.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Trade Liberalization and Firm Dynamics
      by Christian Zimmermann in NEP-DGE blog on 2011-04-26 19:09:20

    Citations

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    Cited by:

    1. Kyle Handley & Nuno Limão, 2015. "Trade and Investment under Policy Uncertainty: Theory and Firm Evidence," American Economic Journal: Economic Policy, American Economic Association, vol. 7(4), pages 189-222, November.
    2. Liao, Wei & Santacreu, Ana Maria, 2015. "The trade comovement puzzle and the margins of international trade," Journal of International Economics, Elsevier, vol. 96(2), pages 266-288.
    3. Cacciatore, Matteo, 2014. "International trade and macroeconomic dynamics with labor market frictions," Journal of International Economics, Elsevier, vol. 93(1), pages 17-30.
    4. Di Ubaldo, Mattia, 2016. "Firms and trade in downturns," Economics PhD Theses 0416, Department of Economics, University of Sussex.
    5. Douglas L. Campbell, 2013. "Relative Prices, Hysteresis, and the Decline of American Manufacturing," 2013 Papers pca584, Job Market Papers.
    6. Breinlich, Holger, 2014. "Heterogeneous firm-level responses to trade liberalization: A test using stock price reactions," Journal of International Economics, Elsevier, vol. 93(2), pages 270-285.
    7. Alessandria, George & Choi, Horag, 2014. "Establishment heterogeneity, exporter dynamics, and the effects of trade liberalization," Journal of International Economics, Elsevier, vol. 94(2), pages 207-223.
    8. Schröder, Philipp J.H. & Sørensen, Allan, 2012. "Firm exit, technological progress and trade," European Economic Review, Elsevier, vol. 56(3), pages 579-591.
    9. Kropf, Andreas & Sauré, Philip, 2014. "Fixed costs per shipment," Journal of International Economics, Elsevier, vol. 92(1), pages 166-184.
    10. Kalina Manova & Zhiwei Zhang, 2012. "Export Prices Across Firms and Destinations," The Quarterly Journal of Economics, Oxford University Press, vol. 127(1), pages 379-436.
    11. Liu, Runjuan & Rosell, Carlos, 2013. "Import competition, multi-product firms, and basic innovation," Journal of International Economics, Elsevier, vol. 91(2), pages 220-234.
    12. Florian Mölders, 2016. "On the Path to Trade Liberalisation: Political Regimes in Trade Negotiations," The World Economy, Wiley Blackwell, vol. 39(7), pages 890-924, July.
    13. Peter Arendorf Bache, 2012. "A Dynamic Model of Trade with Heterogeneous Firms," Economics Working Papers 2012-03, Department of Economics and Business Economics, Aarhus University.

    More about this item

    JEL classification:

    • F1 - International Economics - - Trade
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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