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International trade and competitiveness

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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.

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Authors and Affiliations

  1. Institute for Research in Economics and Business Administration (SNF), Norwegian School of Economics and Business Administration (NHH), Breiviksveien 40, 5045, Bergen, Norway

    Armando J. Garcia Pires

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  1. Armando J. Garcia Pires
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Correspondence to Armando J. Garcia Pires.

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We thank Tim Kehoe and two anonymous referees for extremely helpful comments and suggestions. The paper has also benefited greatly from discussions with Gianmarco Ottaviano, Paula Fontoura, Pedro Pita Barros, Pedro Pontes, Peter Neary and Renato Flôres. The usual disclaimer however applies.

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Garcia Pires, A.J. International trade and competitiveness. Econ Theory 50, 727–763 (2012). https://doi.org/10.1007/s00199-010-0586-2

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