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MARKET ACCESS, INVESTMENT, AND HETEROGENEOUS FIRMS *
Author(s) -
Spearot Alan C.
Publication year - 2013
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/iere.12008
Subject(s) - productivity , tariff , economics , price elasticity of demand , market access , incentive , investment (military) , foreign direct investment , monetary economics , microeconomics , industrial organization , international economics , business , macroeconomics , agriculture , ecology , biology , politics , political science , law
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.