New developments in the world economy have triggered research designed to better understand the changes in trade and investment patterns, and the reorganization of production across national borders. Although traditional trade theory has much to offer in explaining parts of this puzzle, other parts required new approaches. Particularly acute has been the need to model alternative forms of involvement of business firms in foreign activities because organizational change has been central in the transformation of the world economy. This paper reviews the literature that has emerged from these efforts. The theoretical refinements have focused on the individ-ual firm, studying its choices in response to its own characteristics, the nature of the industry in which it operates, and the opportunities afforded by foreign trade and investment. Important among these choices are organizational features, such as sourcing strategies. But the theory has gone beyond the individual firm, studying the implications of firm behavior for the structure of industries. It provides new explana-tions for trade structure and patterns of foreign direct investment, both within and across industries, and has identified new sources of comparative advantage.

ABSTRACT __________________________________________________________________________ This paper evaluates the performances of three of the most prominent multisectoral static applied general equilibrium models used to predict the impact of the North American Free Trade Agreement. These models drastically underestimated the impact of NAFTA on North American trade. Furthermore, the models failed to capture much of the relative impacts on different sectors. Ex-post performance evaluations of applied GE models are essential if policymakers are to have confidence in the results produced by these models. Such evaluations also help make applied GE analysis a scientific discipline in which there are well-defined puzzles with clear successes and failures for competing theories. Analyzing sectoral trade data indicates the need for a new theoretical mechanism that generates large increases in trade in product categories with little or no previous trade. To capture changes in macroeconomic aggregates, the models need to be able to capture changes in productivity.

Brazil’s trade liberalization between 1990 and 1993, and its partial reversal in 1995, are used to study how trade affects productivity. The production function of Brazilian manufacturers is estimated at the SIC two-digit level under an extension of Olley and Pakes ’ (1996) procedure. Firm-level productivity is inferred and then related to trade in a causal analysis. Findings suggest that (1) the use of foreign inputs plays a minor role for productivity change, whereas (2) foreign competition pressures firms to raise productivity markedly. (3) The shutdown probability of inefficient firms rises with competition from abroad, thus contributing positively to aggregate productivity. Counterfactual simulations indicate that the competitive push (2) is a salient source of immediate productivity change, while the elimination of inefficient firms (3) unfolds its impact slowly. JEL F14, F43 I am indebted to my advisors Maury Obstfeld, David Romer, Dan McFadden and Pranab

The equilibrium relationship between trade and the spatial distribution of economic activity is fundamental to the analysis of national and regional trade patterns, as well as to the effect of trade frictions. We study this relationship using a trade model with a continuum of regions, transport costs, and agglomeration effects caused by production externalities. We analyze the equilibrium specialization and trade pat-terns for different levels of transport costs and externality parameters. Understand-ing trade via the distribution of economic activity in space naturally rationalizes the evidence on border effects and the “gravity equation. ” (JEL F1, R0, R3) Trade is spatial by nature. The distribution of economic activity in space determines the pat-tern of trade across and within countries. Con-versely, trade allows firms in a region to specialize in the production of a small number of goods, while consumers and firms demand a much larger basket of products. Casual obser-

The statistical analysis of firm-level data on U.S. multinational corporations reported in this study was conducted at the International Investment Division, Bureau of Economic Analysis, U.S. Department of Commerce, under arrangements that maintained legal confidentiality requirements. Views expressed are those of the authors and do not necessarily reflect those of the Department of Commerce. Suggestions and assistance from William Zeile and It is well known that trade has been growing more rapidly than GDP in recent decades. Between 1982 and 1994, the growth of U.S. foreign trade (exports plus imports) averaged more than 5 % per year in real terms, while real GDP grew 3 % per year. According to Rugman (1988), over half of world trade involves large multinational corporations (MNCs). MNC-based trade

In this paper, we build a dynamic model with endogenous firm-level productivity that generates firm heterogeneity as an equilibrium outcome. Firm heterogeneity arises in equilibrium from the gradual diffusion of a technological innovation through the industry. We investigate the effects of international trade on technological diffusion and show that trade has a generally positive impact on the equilibrium rate of adoption (and hence firm-level productivity). In addition, the model can replicate the stylized fact that exporters are larger and more productive than non-exporters. Finally, we show that the model can explain two puzzling facts from the Canadian experience with NAFTA: Why US tariff reductions decreased the number of Canadian firms; and why Canadian tariff reductions lowered the productivity of the most productive Canadian firms but raised it for the least productive firms.

Abstract This paper reviews the new approach to international trade based on firm heterogeneity in differentiated product markets. This approach explains a variety of features exhibited in disaggregated trade data, including the higher productivity of exporters relative to non-exporters, within-industry reallocations of resources following trade liberalization, and patterns of trade participation across firms and destination markets. Accounting for these empirical patterns reveals new mechanisms through which the aggregate economy is affected by trade liberalization, including endogenous increases in average industry and firm productivity. J.E.L. CLASSIFICATION: F10, F12, F14

How does entry affect productivity growth of incumbents? In this paper we exploit policy reforms in the UK that changed entry conditions by opening up the UK economy during the 1980s and panel data on British establishments to shed light on this question. We show that more entry measured by a higher share of industry employment in foreign firms has led to faster total factor productivity growth of domestic incumbent firms and thus to faster aggregate productivity growth.

As currently implemented, the workhorse econometric models of international trade (monopolistic competition, Heckscher-Ohlin, and gravity) do not rigorously incorporate product prices into their estimating equations. They are thus of limited value for assessing the gains from trade liberalization. We model general equilibrium product price e#ects using the CES monopolistic competition model. We then estimate the model and, mimicking computable general equilibrium (CGE) models, use the model to estimate the compensating variation associated with trade liberalization.

We review a recent body of theoretical work that aims to put numbers on the consequences of globalization. A unifying theme of our survey is methodological. We rely on gravity models and demonstrate how they can be used for counterfactual analysis. We highlight how various economic considerations—market structure, firm-level heterogeneity, multiple sectors, intermediate goods, and multiple factors of production—affect the magnitude of the gains from trade liberalization. We conclude by discussing a number of outstanding issues in the literature as well as alternative approaches for quantifying the consequences of globalization.