Economic Theory

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

International trade and competitiveness

Research Article


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.


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

JEL Classification

F12 L13 O31 


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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

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