Academic journal article NBER Reporter

International Trade and Investment

Academic journal article NBER Reporter

International Trade and Investment

Article excerpt

The International Trade and Investment (ITI) Program does research on patterns of international trade and foreign direct investment; policies designed to influence the level of trade and investment; and their consequences on importing and exporting countries, such as for their wages, growth, the environment, and so on. Empirical work in the Program has benefited from several new datasets covering both U.S. and global trade at a detailed level; these are now available from the NBER (see NBER Service Brings You New Data for Free). (1) In this review, we cover work completed since last the Program Report in Winter 2000/2001, beginning with a new research area dealing with the microeconomics of the trading firm.

Microeconomics of The Trading Firm

Traditionally, theories of international trade have explained trade patterns by appealing to differences in the factor endowments found in various countries or to cross-country differences in industry productivity. That type of research continues, extending earlier models to allow for multiple industries, factors of production, and countries. (2) However, a new line of research digs deeper into the determinants of trade by allowing for differences across firms and recognizing that only the most productive firms will become exporters. That theoretical prediction receives strong empirical confirmation; generally, the new theory allows for a rich exploration of firm-level differences in datasets for the United States and other countries. Here are summaries of several research areas within this broad topic:

Firm Heterogeneity

The first way that firms can differ is in terms of productivity. Jonathan Eaton and Samuel Kortum introduced a Ricardian model with heterogeneous firms. (3) In that model, firms receive random productivity draws and compete with other firms producing the identical product, so that only the most productive firm survives within each country. Across countries, however, firms face differing transportation costs on their sales to external markets, so that multiple firms can be producing the same product and selling to different markets.

A second model with heterogeneous firms is attributable to Marc Melitz. (4) His work builds on an earlier model of monopolistic competition and trade in which goods are differentiated. In contrast to other researchers, Melitz allows the firms within an industry to be heterogeneous in their productivities. Each firm has to pay a fixed cost (for example, to develop its differentiated product), so that only the more productive firms will end up being profitable, while the least-productive firms exit the market. Furthermore, Melitz assumes that there is an additional fixed cost of exporting (for example, to market the product abroad), so that only the most productive firms find it profitable to export. This model has been extended to allow for multiple industries with differentiated products in each. (5)

These ideas have been applied to datasets on U.S. and French firms, as well as some for developing countries. (6) For the United States, Andrew B. Bernard, J. Bradford Jensen, and Peter K. Schott have studied the factors leading to the exit of manufacturing firms, including competition from low-wage countries and declining trade barriers. (7) Generally, exits occur less frequently at multi-product plants, at exporters, and at plants paying above average wages. In addition, productivity growth is faster in industries with falling trade costs, and plants in industries with falling trade costs are more likely to die or become exporters. Eaton, Kortum, and Francis Kramarz find that in France, firms differ substantially in export participation, with most firms only selling at home, and that markets in which French firms have a large share are also those where many more firms are exporting. (8)

These empirical applications depend on having firm-level datasets, which are not always available. …

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