Abstract: This paper examines how trade liberalization affects the innovation incentives of firms, and what this implies for industry productivity and social welfare. For this purpose we develop a reciprocal dumping model of international trade with heterogeneous firms and endogenous R&D. We identify two effects of trade liberalization on productivity: a direct effect through changes in R&D investment, and a selection effect due to inefficient firms leaving the market. 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 industry productivity; and (iii) raises expected social welfare if trade costs are low.

This paper develops a trade model with firm-specific quality heterogeneity, limit pricing, and an endogenous distribution of markups. Exposure to trade induces only the firms producing high-quality (high-price) products to enter the export markets, whereas firms producing low-quality (low-price) products serve the domestic market in accordance to the Alchian and Allen (1964) conjecture. Trade liberalization intensifies the competition; causes firms producing low-quality products to exit the market; increases the number of products consumed in each country; raises national and global welfare; and generates quality upgrading that results in higher and average domestic and export markups. Interestingly, the laissez-faire equilibrium is inefficient, and this leaves room for welfare-improving government intervention.

This paper develops an oligopolistic model of international trade with hetero-geneous firms to examine how trade liberalization affects R&D investment, industry productivity and social welfare. We identify three effects of trade liberalization on industry productivity: (i) a direct effect through changes in R&D; (ii) a scale effect due to changes in firm size; and (iii) a selection effect due to inefficient firms leaving the market and efficient firms becoming ex-porters and expanding their overall market share. 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) decreases (increases) R&D for high (low) trade costs; (ii) increases firm size if trade costs are high; (iii) induces a reallocation of market shares within the industry; (iv) raises consumer surplus; and (v) raises exports. JEL classification: F12, F15

Do open economies earn better economic performance than closed economies? The most basic measure of openness is the simple trade volume, which is exports plus imports divided by GDP. A large number of empirical studies found a positive relationship, but few theoretical studies used this definition in endogenous growth models. We develop a two-country (Home and Foreign) by two-good (consumption good and investment good) by one factor (capital) endogenous growth model with international knowledge spillover to study the relationship between trade volume and economic growth. We find that trade volume are positively related to economic growth rate when a variation from the production coefficients in both countries.

Multinational production and trade in an endogenous growth model with heterogeneous firms

The impact of development aid on education and health: Survey and new evidence from dynamic models

This paper develops a fully-endogenous, variety-expansion growth model with firmspecific quality heterogeneity, limit pricing, and an endogenous distribution of markups. Trade induces only firms with high-quality products to export, whereas firms with lowquality products serve only the domestic market. Trade liberalization, measured by a reduction in trade costs or a reduction in foreign-market entry costs, shifts resources from low-quality to high-quality products and intensifies the product market competition. However, it has ambiguous effects on the average markup, long-run growth, and welfare. An increase in the rate of population growth or in the intensity of international knowledge spillovers accelerates economic growth. The laissez-faire equilibrium is inefficient, and this leaves room for welfare-improving government intervention.

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This paper develops an oligopolistic model of international trade with het-erogeneous 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. JEL classification: F12, F15

In a small open economy with heterogeneous firms, in which tariffs determine the mass of active firms, the gains from trade liberalization depend positively on the level of firm vertical heterogeneity (quality heterogeneity) and negatively on transportation costs. The benefits from temporary protection depend on the quality gap: for a given mass of backward firms, the relative gains from protection increase with their quality and decrease with the quality of advanced firms; for given production quality levels, the relative advantage of protection increases with the mass of backward firms.