Working Paper: NBER ID: w18972
Authors: Costas Arkolakis; Natalia Ramondo; Andrés Rodríguez-Clare; Stephen Yeaple
Abstract: The decline in the costs of multinational production (MP) has led some countries to specialize in innovation and others to specialize in production. To study the aggregate and distributional implications of this phenomenon, we develop a quantifiable general equilibrium model of trade and MP. Specialization is endogenously determined as a result of comparative advantage and home market effects (HME) that arise from the interaction between increasing returns to innovation and geographical frictions. The model yields simple structural expressions for bilateral trade and MP that we use to calibrate it across a set of OECD countries. Comparative statics exercises reveal that the reduction in the cost of MP or the integration of China into the world economy may hurt countries that are driven to specialize in production due to HMEs, although these losses tend to be very small. Contrary to popular fears, we find that production workers gain even in countries that further specialize in innovation.
Keywords: multinational production; innovation; globalization; welfare implications; trade
JEL Codes: F1; F23; F6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Reduction in the costs of multinational production (MP) (F23) | Greater specialization across countries in innovation and production (F12) |
| Greater specialization in innovation (O39) | Real income gains for countries (F61) |
| Greater specialization in production (L23) | Small welfare losses for countries (D69) |
| Greater specialization in innovation (O39) | Benefits for production workers (J32) |
| Contraction in innovation sector (O39) | Losses for innovation workers (O39) |
| Integration of China into the global economy (F15) | Countries with strong ties to China specialize in innovation (O39) |
| Countries specializing in innovation due to China's integration (O36) | Overall gains for production workers (J39) |
| Increased trade and MP costs between the UK and the EU (F19) | Significant implications for specialization and welfare (D69) |