Economic Theory

, Volume 50, Issue 3, pp 727–763 | Cite as

International trade and competitiveness

Research Article

Abstract

We analyze the role of international market size differences in determining the investment in process R&D (and thus firms’ competitiveness) in a trade model with oligopolistic market structure, non-homothetic production technology and costly trade. We show that the R&D effort is higher (or even disproportionately so) for firms in the larger market, which causes endogenous asymmetries across countries. As a result, firms in the larger market have higher competitiveness, which increases their market shares in international markets. Furthermore, and contrary to what is predicted by Krugman (Am Econ Rev 70:950–959, 1980) “home market effect”, in equilibrium the larger country does not need to host a disproportionately higher share of the world’s industry than of the world’s demand. Despite this, the larger country can still continue to run a trade surplus in the oligopolistic sector, since it hosts firms with higher competitiveness than firms in the smaller country.

Keywords

Endogenous asymmetric firms Competitiveness R&D investment International trade Home market effect Oligopoly 

JEL Classification

F12 L13 O31 

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Amable B., Verspagen B.: The role of technology in market share dynamics. Appl Econ 27, 197–204 (1995)CrossRefGoogle Scholar
  2. Antweiler W., Trefler D.: Increasing returns and all that: a view from trade. Am Econ Rev 92, 93–119 (2002)CrossRefGoogle Scholar
  3. Aw B., Roberts M., Xu D.: R&D investments, exporting, and the evolution of firm productivity. Am Econ Rev 98, 451–456 (2008)CrossRefGoogle Scholar
  4. Aw, B., Roberts, M., Xu, D.: R&D investment, exporting, and productivity dynamics. NBER Working Paper 14670 (2009)Google Scholar
  5. Backus D., Kehoe P., Kehoe T.: In search of scale effects in trade and growth. J Econ Theory 58, 377–409 (1992)CrossRefGoogle Scholar
  6. Baldwin R., Forslid R., Martin P., Ottaviano G., Robert-Nicoud F.: Public Policies and Economic Geography. PUP, Princeton (2003)Google Scholar
  7. Bergoeing, R., Kehoe, T.: Trade theory and trade facts. Federal Reserve Bank of Minneapolis Research Department Staff Report 284 (2003)Google Scholar
  8. Bernard A., Jensen J.: Exceptional exporter performance: cause, effect, or both?. J Int Econ 47, 1–25 (1999)CrossRefGoogle Scholar
  9. Bernard A., Eaton J., Jensen J., Kortum S.: Plants and productivity in international trade. Am Econ Rev 93, 1268–1290 (2003)CrossRefGoogle Scholar
  10. Bond, E., Iwasa, K., Nishimura, K.: A dynamic two country Heckscher–Ohlin model with non-homothetic preferences. (forthcoming): Econ Theory (2010)Google Scholar
  11. Brander J.: Intra industry trade in identical commodities. J Int Econ 11, 1–14 (1981)CrossRefGoogle Scholar
  12. Brander J., Krugman P.: A ‘reciprocal dumping’ model of international trade. J Int Econ 15, 313–321 (1983)CrossRefGoogle Scholar
  13. Campbell J., Hopenhayn H.: Market size matters. J Ind Econ 53, 1–25 (2005)CrossRefGoogle Scholar
  14. Davis D.: The home market, trade, and industrial structure. Am Econ Rev 88, 1264–1276 (1998)Google Scholar
  15. Davis, D., Weinstein, D.: Does economic geography matter for international specialization? NBER Working Paper 5706 (1996)Google Scholar
  16. Davis D., Weinstein D.: Economic geography and regional production structure: an empirical investigation. Eur Econ Rev 43, 379–407 (1999)CrossRefGoogle Scholar
  17. Davis D., Weinstein D.: Market access, economic geography and comparative advantage: an empirical assessment. J Int Econ 59, 1–23 (2003)CrossRefGoogle Scholar
  18. Dinopoulos E., Syropoulos C.: Rent protection as a barrier to innovation and growth. Econ Theory 32, 309–332 (2007)CrossRefGoogle Scholar
  19. Eaton J., Gutierrez E., Kortum S.: European technology policy. Econ Policy 13, 405–439 (1998)CrossRefGoogle Scholar
  20. Eaton J., Kortum S.: Technology, geography, and trade. Econometrica 70, 1741–1779 (2002)CrossRefGoogle Scholar
  21. Fagerberg J.: International competitiveness. Econ J 98, 355–374 (1988)CrossRefGoogle Scholar
  22. Fagerberg, J.: Is there a large-country advantage in high-tech? NUPI Working Paper 526 (1995)Google Scholar
  23. Flam H., Helpman E.: Industrial policy under monopolistic competition. J Int Econ 22, 79–102 (1987)CrossRefGoogle Scholar
  24. Forslid R., Ottaviano G.: An analytically solvable core-periphery model. J Econ Geogr 3, 229–241 (2003)CrossRefGoogle Scholar
  25. Fudenberg D., Tirole J.: The fat-cat effect, the puppy-dog ploy, and the lean and hungry look. Am Econ Rev 74, 361–366 (1984)Google Scholar
  26. Fudenberg D., Tirole J.: Game Theory. MIT Press, Cambridge (1991)Google Scholar
  27. Fung M.: Technological opportunity and economies of scale in research productivity: a study on three global industries. Rev Ind Org 21, 419–436 (2002)CrossRefGoogle Scholar
  28. Grubel H., Lloyd P.: Intra-Industry Trade. Wiley, New York (1975)Google Scholar
  29. Gustavsson P., Hansson P., Lundberg L.: Technology, resource endowments and international competitiveness. Eur Econ Rev 43, 1501–1530 (1999)CrossRefGoogle Scholar
  30. Harrigan J.: Openness to trade in manufactures in the OECD. J Int Econ 40, 23–39 (1996)CrossRefGoogle Scholar
  31. Head K., Ries J.: Increasing returns versus national product differentiation as an explanation for the pattern of U.S.-Canada trade. Am Econ Rev 91, 858–876 (2001)CrossRefGoogle Scholar
  32. Head K., Mayer T., Ries J.: On the pervasiveness of home market effects. Economica 69, 371–390 (2002)CrossRefGoogle Scholar
  33. Helpman E.: Imperfect competition and international trade: evidence from fourteen industrial countries. J Japan Int Econ 1, 62–81 (1987)CrossRefGoogle Scholar
  34. Hummels D., Levinsohn J.: Monopolistic competition and international trade: reconsidering the evidence. Q J Econ 110, 799–836 (1995)CrossRefGoogle Scholar
  35. Krugman P.: Scale economies, product differentiation, and the pattern of trade. Am Econ Rev 70, 950–959 (1980)Google Scholar
  36. Krugman P.: Import protection as export promotion: international competition in the presence of oligopoly and economics of scale. In: Kierzkowski, H. (ed.) Monopolistic Competition and International Trade, Clarendon Press, Oxford (1984)Google Scholar
  37. Krugman P.: Increasing returns and economic geography. J Polit Econ 99, 413–499 (1991)CrossRefGoogle Scholar
  38. Lachenmaier S., Wöβmannt L.: Does innovation cause exports? Evidence from exogenous innovation impulses and obstacles using German micro data. Oxf Econ Pap 58, 317–350 (2006)CrossRefGoogle Scholar
  39. Lai E., Riezman R., Wang P.: Outsourcing of innovation. Econ Theory 38, 485–515 (2009)CrossRefGoogle Scholar
  40. Lawrence C., Spiller P.: Product diversity, economies of scale, and international trade. Q J Econ 98, 63–83 (1983)CrossRefGoogle Scholar
  41. Leahy D., Neary P.: Public policy towards R&D in oligopolistic industries. Am Econ Rev 87, 642–662 (1997)Google Scholar
  42. Leahy D., Neary P.: Multilateral subsidy games. Econ Theory 41, 41–66 (2009)CrossRefGoogle Scholar
  43. Licandro, O., Navas-Ruiz, A.: Trade liberalization, competition and growth. CEPR Discussion Papers 6500 (2007)Google Scholar
  44. Lundbäck E., Torstensson J.: Demand, comparative advantage and economic geography in international trade: evidence from the OECD. Rev World Econ 134, 230–249 (1998)Google Scholar
  45. Lundberg L.: Technology, factor proportions and competitiveness. Scand J Econ 90, 173–189 (1988)CrossRefGoogle Scholar
  46. Magnier A., Toujas-Bernate J.: Technology and trade: empirical evidence for the major five industrialized countries. Rev World Econ 130, 494–520 (1994)Google Scholar
  47. Martin P., Rogers C.: Industrial location and public infrastructure. J Int Econ 39, 335–351 (1995)CrossRefGoogle Scholar
  48. Melitz M.: The impact of trade on intra-industry reallocations and aggregate industry productivity. Econometrica 71, 1695–1725 (2003)CrossRefGoogle Scholar
  49. Melitz M., Ottaviano G.: Market size, trade, and productivity. Rev Econ Stud 75, 295–316 (2008)CrossRefGoogle Scholar
  50. Naghavi A., Ottaviano G.: Offshoring and product innovation. Econ Theory 38, 517–532 (2009)CrossRefGoogle Scholar
  51. Neary P., Tharakan J.: Endogenous Mode of Competition in General Equilibrium. Mimeo University of Oxford, Oxford (2008)Google Scholar
  52. Okuno-Fujiwara M., Suzumura K.: Symmetric Cournot oligopoly and economic welfare: a synthesis. Econ Theory 3, 43–59 (1993)CrossRefGoogle Scholar
  53. Ottaviano G., Tabuchi T., Thisse J.-F.: Agglomeration and trade revisited. Int Econ Rev 23, 409–435 (2002)Google Scholar
  54. Petrakis E., Vlassis M.: Endogenous wage bargaining institutions in oligopolistic sectors. Econ Theory 24, 55–73 (2004)CrossRefGoogle Scholar
  55. Roberts M., Tybout J.: The decision to export in Colombia: an empirical model of entry with sunk costs. Am Econ Rev 87, 545–564 (1997)Google Scholar
  56. Roper S., Love J.: Innovation and export performance: evidence from the UK and German manufacturing plants. Res Policy 31, 1087–1103 (2002)CrossRefGoogle Scholar
  57. Syverson C.: Prices, spatial competition and heterogeneous producers: an empirical test. J Ind Econ 55, 197–222 (2007)CrossRefGoogle Scholar
  58. Teteryatnikova M.: R&D in the Network of International Trade: Multilateral Versus Regional Trade Agreements. Mimeo European University Institute, Mimeo (2008)Google Scholar
  59. Torstensson J.: Country size and comparative advantage: an empirical study. Rev World Econ 134, 590–611 (1998)Google Scholar
  60. Tybout J.: Plant- and firm-level evidence on the ‘new’ trade theories. In: Kwan Choi, E., Harrigan, J. (eds) Handbook of International Trade, Blackwell, Oxford (2003)Google Scholar
  61. Vives X.: Oligopoly Pricing: Old Ideas and New Tools. MIT Press, Cambridge (2001)Google Scholar
  62. Wakelin K.: Innovation and export behaviour at the firm level. Res Policy 26, 829–842 (1998)CrossRefGoogle Scholar
  63. Zhou H.: The division of labor and the extent of the market. Econ Theory 24, 195–209 (2004)CrossRefGoogle Scholar

Copyright information

© Springer-Verlag 2010

Authors and Affiliations

  1. 1.Institute for Research in Economics and Business Administration (SNF)Norwegian School of Economics and Business Administration (NHH)BergenNorway

Personalised recommendations