DP5894 Trade Liberalization and Productivity Growth

Author(s): Peter Gustafsson, Paul Segerstrom
Publication Date: October 2006
Keyword(s): endogenous fimrs, heterogenous firms, international trade, productivity growth, trade liberalization
JEL(s): F12, F13, O31, O41
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=5894

This paper presents a trade model with firm-level productivity differences and R&D-driven growth. Trade liberalization causes the least productive firms to exit but also slows the development of new products. The overall effect on productivity growth depends on the size of intertemporal knowledge spillovers in R&D. When these spillovers are relatively weak, then trade liberalization promotes productivity growth in the short run and makes consumers better off in the long run. However, when these spillovers are relatively strong, then trade liberalization retards productivity growth in the short run and makes consumers worse off in the long run.