I thank Charles Horioka and three anonymous referees for helpful comments. This article has also benefited from useful comments by Tor-Erik Bakke, Menzie Chinn, Federico Díez, Charles Engel, John Kennan, Mina Kim, Phillip McCalman, Marc Muendler, and Robert Staiger, and presentations at UC–Davis, UC–Santa Cruz, Boston College, Syracuse, Washington State, Wisconsin, SCCIE 2007, and EIIT 2006. All remaining errors are my own. Please address correspondence to: Alan Spearot, Economics Department, University of California–Santa Cruz, 1156 High Street, Santa Cruz, CA 95064. Phone: +1 831 419 2813. E-mail: firstname.lastname@example.org.
MARKET ACCESS, INVESTMENT, AND HETEROGENEOUS FIRMS*
Article first published online: 17 APR 2013
© (2013) by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association
International Economic Review
Volume 54, Issue 2, pages 601–627, May 2013
How to Cite
Spearot, A. C. (2013), MARKET ACCESS, INVESTMENT, AND HETEROGENEOUS FIRMS. International Economic Review, 54: 601–627. doi: 10.1111/iere.12008
Manuscript received October 2011; revised May 2012.
- Issue published online: 17 APR 2013
- Article first published online: 17 APR 2013
This article presents a model of international trade in which heterogeneous firms can expand through capital acquisitions. I show that demand elasticities are a crucial element in predicting which firms invest, in what location, and for what reason. High-productivity firms, who tend to sell goods at a low elasticity, invest for market access (tariff jumping). Middle productivity firms, who tend to sell at a higher elasticity, invest for productivity improvement. The relative value of trade costs dictates which incentive is larger. In equilibrium, trade liberalization can reduce aggregate productivity by reducing an important source of investment demand: foreign firms.