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Closing the Technology Gap: Does Trade Liberalization Really Help?

  • Dani Rodrik

A common theme in discussions of trade reform is the possibility of improved technical efficiency following trade liberalization, This paper presents a conceptual analysis of the likely linkages between trade regimes and technical efficiency. Three sets of arguments, having to do with X-inefficiency, macroeconomic instability, and increasing returns to scale, are reviewed and found misleading or incomplete. A simple model of technological catch-up by a domestic firm shows the opposite of the usual argument: the larger market share provided by protection to the firm increases its incentives to invest in technological effort. When modified to include oligopolistic considerations at home, the model suggests that the incentives could go either way, depending on the mode of strategic conduct. The presence of economies of scale provides perhaps the strongest reason for productivity improvements, but here the argument relies on frictionless entry into and exit from industries. The paper concludes that the relationship between trade policy and technical efficiency is fundamentally ambiguous.

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File URL: http://www.nber.org/papers/w2654.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2654.

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Date of creation: Jul 1988
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Publication status: published as Gerald K. Helleiner, ed., Trade Policy, Industrialization and Development: A Reconsideration. Oxford, England: Clarendon Press, 1991.
Handle: RePEc:nbr:nberwo:2654
Note: ITI IFM
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  1. Jagdish N. Bhagwati, 1978. "Anatomy and Consequences of Exchange Control Regimes," NBER Books, National Bureau of Economic Research, Inc, number bhag78-1, 07.
  2. Wing Thye Woo & Anwar Nasution, 1989. "External Debt Management," NBER Chapters, in: Developing Country Debt and Economic Performance, Volume 3: Country Studies - Indonesia, Korea, Philippines, Turkey, pages 114-129 National Bureau of Economic Research, Inc.
  3. Brown, D.K. & Stern, R.M., 1988. "U.S.-Canada Bilateral Tariff Elimination: The Role Of Product Differentiation And Market Structure," Working Papers 227, Research Seminar in International Economics, University of Michigan.
  4. Dixit, Avinash K, 1986. "Comparative Statics for Oligopoly," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(1), pages 107-22, February.
  5. Jeffrey D. Sachs, 1987. "Trade and Exchange Rate Policies in Growth-Oriented Adjustment Programs," NBER Working Papers 2226, National Bureau of Economic Research, Inc.
  6. Teitel, Simon & Colman Sercovich, Francisco, 1984. "Latin America," World Development, Elsevier, vol. 12(5-6), pages 645-660.
  7. Harris, Richard, 1984. "Applied General Equilibrium Analysis of Small Open Economies with Scale Economies and Imperfect Competition," American Economic Review, American Economic Association, vol. 74(5), pages 1016-32, December.
  8. Condon, Timothy & de Melo, Jaime, 1991. "Industrial Organization Implications of QR Trade Regimes: Evidence and Welfare Costs," Empirical Economics, Springer, vol. 16(1), pages 139-53.
  9. Nishimizu, Mieko & Robinson, Sherman, 1984. "Trade policies and productivity change in semi-industrialized countries," Journal of Development Economics, Elsevier, vol. 16(1-2), pages 177-206.
  10. de Melo, Jaime & Urata, Shujiro, 1986. "The influence of increased foreign competition on industrial concentration and profitability," International Journal of Industrial Organization, Elsevier, vol. 4(3), pages 287-304, September.
  11. Krueger, Anne O & Tuncer, Baran, 1982. "An Empirical Test of the Infant Industry Argument," American Economic Review, American Economic Association, vol. 72(5), pages 1142-52, December.
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