DP6948 Globalization and the Size Distribution of Multiproduct Firms

Author(s): Volker Nocke, Stephen R Yeaple
Publication Date: August 2008
Keyword(s): firm heterogeneity, firm size distribution, merger wave, multiproduct firms, productivity, size discount, trade liberalization
JEL(s): F12, F15
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=6948

We develop a theory of multiproduct firms to analyze the effects of globalization on the distributions of firm size, scope, and productivity. In the model, firms are heterogeneous in how well they cope with expanding their product range. The model generates a negative relationship between firm size and market-to-book ratio, thus explaining the "size-discount puzzle" found in the data. Globalization induces a merger wave that leads to an improvement in average productivity. This improvement is not due to selection effects but rather due to product-level productivity effects. The model predicts that globalization leads to a flattening of the size distribution of firms.