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The Effects of Trade Liberalization on Productivity and Welfare: The Role of Firm Heterogeneity, R&D and Market Structure

  • Stähler, Frank
  • Raff, Horst
  • Long, Ngo Van

This paper develops an oligopolistic model of international trade with heterogeneous firms and endogenous R&D to examine how trade liberalization affects firm and industry productivity, as well as social welfare. We identify four effects of trade liberalization on productivity: (i) a direct effect through changes in R&D investment; (ii) a scale effect due to changes in firm size; (iii) a selection effect due to inefficient firms leaving the market; and (iv) a market-share reallocation effect as efficient firms expand and inefficient firms reduce their output. We show how these effects operate in the short run when market structure is fixed, and in the long run when market structure is endogenous. Among the robust results that hold for any market structure are that trade liberalization (i) increases (decreases) aggregate R&D for low (high) trade costs; (ii) increases expected firm size if trade costs are high; and (iii) raises expected social welfare if trade costs are low.

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File URL: https://econstor.eu/bitstream/10419/22036/1/EWP-2007-20.pdf
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Paper provided by Christian-Albrechts-University of Kiel, Department of Economics in its series Economics Working Papers with number 2007,20.

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Date of creation: 2007
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Handle: RePEc:zbw:cauewp:5686
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  1. Fernandes, Ana M., 2003. "Trade policy, trade volumes, and plant-level productivity in Colombian manufacturing industries," Policy Research Working Paper Series 3064, The World Bank.
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  4. Cox, David & Harris, Richard, 1985. "Trade Liberalization and Industrial Organization: Some Estimates for Canada," Journal of Political Economy, University of Chicago Press, vol. 93(1), pages 115-45, February.
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  14. Nina Pavcnik, 2002. "Trade Liberalization, Exit, and Productivity Improvements: Evidence from Chilean Plants," Review of Economic Studies, Oxford University Press, vol. 69(1), pages 245-276.
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  16. Miyagiwa, Kaz & Ohno, Yuka, 1995. "Closing the Technology Gap under Protection," American Economic Review, American Economic Association, vol. 85(4), pages 755-70, September.
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  18. Muendler, Marc-Andreas, 2004. "Trade, Technology, and Productivity: A Study of Brazilian Manufacturers, 1986-1998," University of California at San Diego, Economics Working Paper Series qt6m96c2r7, Department of Economics, UC San Diego.
  19. Josh Ederington & Phillip McCalman, 2007. "The Impact of Trade Liberalization on Productivity Within and Across Industries: Theory and Evidence," Monash Economics Working Papers 24-07, Monash University, Department of Economics.
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  29. repec:rus:hseeco:122439 is not listed on IDEAS
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