Shaking All Over? International Trade and Industrial Dynamics

Abstract:     
This paper develops a model of international trade and industrial evolution. Evolution is driven by the endogenous technology choices of firms which generates a rich industrial environment that includes the possibility of a dramatic shakeout. The likelihood, magnitude and timing of this shakeout is characterized and depends not only on the size of the innovation but also on the structure of production costs. In this setting, trade liberalization is shown to reduce the likelihood of a shakeout, resulting in a more stable industrial structure. However, when shakeouts arise in global markets, the distribution of firm exits can vary widely across countries. Thus, open economy models of industrial evolution offer very different conclusions from closed economy models.

Keywords: international trade, shakeouts, industry dynamics

JEL Classifications: F1, F12, F13, L1

Working Paper Series