Inter-industry trade and heterogeneous firms: country size matters
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Inter‑industry trade and heterogeneous firms: country size matters Hangtian Xu1 · Yiming Zhou2 Received: 10 March 2020 / Revised: 7 September 2020 / Accepted: 27 October 2020 © Japanese Economic Association 2020
Abstract This study investigates how industries with different patterns of firm heterogeneity distribute across countries by developing a three-sector general-equilibrium model. We show that the larger country is more specialized in the industry with heterogeneous (homogeneous) firms when trade costs are low (high) and that an increase in the inter-industry difference in firm heterogeneity fosters the larger country’s degree of specialization in the industry with heterogeneous firms. We also disclose the wage inequality and trade patterns across countries and show how they respond to trade liberalization. Keywords Firm heterogeneity · Industrial specialization · Trade patterns JEL Classification F12 · F22 · R12
1 Introduction In the past decade or so, an extensive established literature has analyzed the role of firm heterogeneity in trade (Melitz 2003; Helpman et al. 2004; Bernard et al. 2007; Melitz and Ottaviano 2008), economic geography (Baldwin and Okubo 2006; Nocke 2006; Okubo et al. 2010), and production organization (Antràs and Helpman 2004), enriching our understanding of observed trade patterns, industrial agglomeration, spatial inequality, and firm integration. Electronic supplementary material The online version of this article (https://doi.org/10.1007/s4297 3-020-00065-5) contains supplementary material, which is available to authorized users. * Yiming Zhou [email protected] Hangtian Xu [email protected] 1
School of Economics and Trade, Hunan University, Changsha 410006, China
2
School of Management, Harbin Institute of Technology, Harbin 150001, China
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The Japanese Economic Review
Most of these studies are based on a single industry framework (usually with a homogeneous goods sector) to make the models more tractable. A few studies such as Bernard et al. (2007) have also considered the inter-industry trade, but they assume an identical pattern of firm heterogeneity across industries. To the best of our knowledge, little attention has thus far been paid to the fact that the degree of firm heterogeneity differs (sometimes enormously) across industries and countries.1 For instance, using micro panel data for producers in seven two-digit manufacturing industries in South Korea and Taiwan, Aw et al. (2003) find that the withinindustry productivity dispersion across producers, productivity differentials between surviving and failing producers, and so on, differ among manufacturing industries and countries. It features a stylized fact that the pattern of firm heterogeneity differs across industries and countries. Among others, by exploiting Italian firm-level data, Gatto et al. (2008) also show that firm heterogeneity in productivity differs across industries and that more open industries feature less dispersion among firms’ marginal costs. In this reg
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