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

Author

Listed:
  • Maemir, H.

    (UNU-MERIT)

  • Ziesemer, T.

    (UNU-MERIT)

Abstract

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 RD 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.

Suggested Citation

  • Maemir, H. & Ziesemer, T., 2014. "Multinational production and trade in an endogenous growth model with heterogeneous firms," MERIT Working Papers 2014-038, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
  • Handle: RePEc:unm:unumer:2014038
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    File URL: https://unu-merit.nl/publications/wppdf/2014/wp2014-038.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    firm heterogeneity; endogenous growth; trade; multinational production; technology spillovers;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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