Working Paper: CEPR ID: DP6049
Authors: Kristian Behrens; Gianmarco I.P. Ottaviano; Giordano Mion
Abstract: We distill the main insights from recent trade models on firms' responses to globalisation. Our primary aim is to assess the economic impact and the welfare implications of the resulting reallocation of resources across firms and countries. In so doing, we bring theory into life through the numerical implementation of a theoretical framework calibrated on European data, which encompasses aspects of economic geography, firm heterogeneity, and firms' organizational choices. Our final purpose is to provide a comprehensive background for empirical investigations and to stimulate further theoretical research.
Keywords: Economic geography; Firm heterogeneity; International integration; Multinationals; Resource reallocation
JEL Codes: F12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Trade liberalization (F13) | Reallocation of resources from less productive to more productive firms (F16) |
| Larger local markets (D40) | Tougher competition (L19) |
| Tougher competition (L19) | Richer product variety (L15) |
| Tougher competition (L19) | Higher productivity (O49) |
| Tougher competition (L19) | Lower prices (D49) |
| Richer product variety, Higher productivity, Lower prices (F61) | Improved welfare (I39) |
| Trade liberalization + Similar technologies across regions (F19) | Increased competition (L13) |
| Increased competition (L13) | Similar welfare improvements (I39) |
| Trade liberalization + Different technologies across regions (F69) | Welfare effects may vary (D69) |
| Advanced regions (R11) | Benefit from trade liberalization (F14) |
| Backward regions (R11) | Temporary welfare declines until trade costs decrease (F16) |
| Presence of multinational firms (F23) | Alters dynamics of competition and resource allocation (L11) |
| Multinational firms (F23) | Leverage advantages in cost-saving and market-seeking strategies (F12) |