Discussion Paper Details

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Title: Selection Effects With Heterogeneous Firms

Author(s): Monika Mrázová and J Peter Neary

Publication Date: January 2013

Keyword(s): Foreign Direct Investment (FDI), Heterogeneous Firms, Proximity-Concentration Trade-Off, R&D with Threshold Effects, Super- and Sub-Convexity and Supermodularity

Programme Area(s): International Trade and Regional Economics

Abstract: We characterize how firms select between alternative ways of serving a market. ``First-order" selection effects, whether firms enter or not, are extremely robust. "Second-order" ones, how firms serve a market conditional on entry, are less so: more efficient firms will select into the entry mode with lower market-access costs, if and only if firms' maximum profits are supermodular in production and market access costs. Supermodularity holds in many cases but not in all. Exceptions include FDI (both horizontal and vertical) when demands are "sub-convex" (i.e., less convex than CES), fixed costs that vary with access mode, and R&D with threshold effects.

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Bibliographic Reference

Mrázová, M and Neary, J. 2013. 'Selection Effects With Heterogeneous Firms'. London, Centre for Economic Policy Research.