Working Paper #2014-038
Multinational production and trade in an endogenous growth model with heterogeneous firms
This paper offers a unified framework to explore both the static and
dynamic welfare effects of trade and multinational production (MP) in
the presence of firm-specific productivity heterogeneity. The model
captures the dynamic effects by allowing for R&D spillovers between
firms in a framework of Helpman et al. (2004) that generates endogenous
growth without scale effects. We show that multinational presence
improves average productivity by strengthening the selection process
among heterogeneous firms, but leads to a lower growth rate of
intermediate varieties along the transition path toward the new steady
state. Thus the presence of multinationals has an ambiguous effect on
overall welfare. We also compare the welfare implications of a change in
trade cost in our model and in trade models without multinationals. We
find that the gains from trade can be higher or lower than the gains
obtained in the trade-only models, depending on the degree of firm
heterogeneity, the size of trade and FDI costs, and the magnitude of
technology spillover parameters. We further show that firm heterogeneity
always magnifies average productivity, international spillovers and
fixed costs of developing a new variety, which leads to ambiguous
effects on overall welfare. Calibrating the model to the US economy
suggests that aggregate welfare improves in response to a reduction in
trade and FDI costs for empirically plausible parameter values.
- Keywords
-
- firm heterogeneity
- endogenous growth
- trade
- multinational production
- technology spillovers
- JEL codes
-
- F12
- F23
- F43
- O31
- O41
Cite this as
APA 7th ed.Maemir, H., & Ziesemer, T. (2014). Multinational production and trade in an endogenous growth model with heterogeneous firms (UNU-MERIT Working Paper No. 2014-038). UNU-MERIT. https://unu-merit.nl/publications/working-papers/abstract/?id=5428