Intra-Industry Trade between Asymmetric Countries with Heterogeneous Firms

University of Nottingham Research Paper No. 2004/05

33 Pages Posted: 28 Feb 2005

See all articles by Rod Falvey

Rod Falvey

Bond University - Department of Economics

David Greenaway

University of Nottingham - School of Economics

Zhihong Yu

University of Nottingham - Leverhulme Centre for Research on Globalisation and Economic Policy (GEP)

Date Written: 2004

Abstract

This paper constructs a two-country intra-industry trade model with efficiency differences at both national and firm level, to focus on the impact of trade on asymmetric countries. We show that in both countries opening up to trade strengthens the self-selection effect, raises average industry revenue, profit and efficiency and generates welfare gains. However, cross-country efficiency gaps lead to substantial differences in the magnitude of these trade-induced changes. The more efficient country has a greater proportion of exporting firms and a higher failure rate, which makes entry more risky. However, for successful entrants expected revenue is higher and entry is therefore also more profitable. Since the rationalisation effect is also stronger in the more efficient country, welfare gains from trade are higher.

Keywords: firm heterogeneity, cross-country efficiency gaps, intra-industry trade

JEL Classification: F12, L11

Suggested Citation

Falvey, Rod and Greenaway, David and Yu, Zhihong, Intra-Industry Trade between Asymmetric Countries with Heterogeneous Firms (2004). University of Nottingham Research Paper No. 2004/05, Available at SSRN: https://ssrn.com/abstract=673512 or http://dx.doi.org/10.2139/ssrn.673512

Rod Falvey (Contact Author)

Bond University - Department of Economics ( email )

Bond University - Department of Economics
Gold Coast, Queensland 4229
Australia

David Greenaway

University of Nottingham - School of Economics ( email )

University Park
Nottingham, NG7 2RD
United Kingdom
+44 115 951 5469 (Phone)
+44 115 951 4159 (Fax)

Zhihong Yu

University of Nottingham - Leverhulme Centre for Research on Globalisation and Economic Policy (GEP) ( email )

University Park
Nottingham, NG7 2RD
United Kingdom