Agglomeration and Trade with Heterogeneous Firms

The paper proposes a model to investigate the influences of agglomeration on heterogeneous firms' exporting behaviors. Competition and thus selection effect caused by agglomeration forces less productive firms to exit the market while agglomeration externalities increase firms' productivity and decreases industrial fixed entry, fixed and variable exporting costs, and effective labor wage. The former factors decrease while the latter increase firms' exporting possibilities and sales. The model shows that the composite effect of agglomeration on firms' exports takes on a Parabola-shape pattern. Moreover, higher-productivity firms benefit more export premium from agglomeration, which explains why larger and more productive firms in larger cities are more possible to export and exports more. Empirical results based on data from Chinese Industrial Enterprises between 1998 and 2007 verify the theoretical results. The paper also investigates the influences of different agglomeration patterns on firms exports, including home market effect, urban economies and competition effect and diversification effect. It shows that the former two patterns exert a positive while the latter two have a positive influence on firms' exporting behaviors.