Working Paper: NBER ID: w2654
Authors: Dani Rodrik
Abstract: 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.
Keywords: Trade Liberalization; Technical Efficiency; Economic Growth; Market Structure; Oligopoly
JEL Codes: F10; O31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increased protection (D18) | Greater technological investment (O39) |
| Increased protection (D18) | Increased market share for domestic firms (L10) |
| Macroeconomic instability (E32) | Indirect effect on productivity (O49) |
| Trade liberalization (F13) | Technical efficiency (D61) |
| Protection (D18) | Lower innovation rates in oligopolistic markets (D43) |