DP9288 Selection Effects With Heterogeneous Firms

Author(s): Monika Mrázová, 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, Supermodularity
JEL(s): F12, F15, F23
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9288

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.