Title

Catching up or pulling away: Intra-industry trade, productivity gaps and heterogeneous firms

Date of this Version

1-1-2011

Document Type

Journal Article

Publication Details

Citation only.

Falvey, R., Greenaway, D., & Yu, Z. (2011). Catching up or pulling away: Intra-industry trade, productivity gaps and heterogeneous firms. Open economies review, 22(1), 17-38.

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2011 HERDC submission. FoR code: 140210

© Copyright Springer Science+Business Media, LLC, 2010

ISSN

0923-7992

Abstract

In this paper we develop a heterogeneous firm, intra-industry trade model in which countries are asymmetric in both technology and size. In the trading equilibrium, the industry productivity levels countries are jointly determined by the technology gap and trade barriers. We find that the (exogenous) technological gap is a key determinant of the size and direction of the intra-industry resource reallocation introduced by trade. Most importantly, the effect of trade on the (endogenous) productivity gap could be non monotonic over time. In the short-run, where the number of incumbents cannot adjust to trade, the effect of import competition dominates and the productivity gap between countries is closed as domestic firms in the laggard country face tougher competition from leading country exporters. However, in the long run when entry is possible, the effect of the increased export opportunities in the leading country dominates and the productivity gap is widened as a consequence of entry in the technological leader.

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This document has been peer reviewed.