Innovation and Production in the Global Economy

65 Pages Posted: 20 Apr 2013

See all articles by Costas Arkolakis

Costas Arkolakis

Yale University - Department of Economics; National Bureau of Economic Research (NBER); Yale University - Cowles Foundation

Natalia Ramondo

University of California, San Diego (UCSD) - Graduate School of International Relations and Pacific Studies (IRPS)

Natalia Ramondo

Arizona State University

Andrés Rodríguez-Clare

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER)

Stephen R. Yeaple

Pennsylvania State University - College of the Liberal Arts - Department of Economic; National Bureau of Economic Research (NBER)

Date Written: April 2013

Abstract

The decline in the costs of multinational production (MP) has led some countries to specialize in innovation and others to specialize in production. To study the aggregate and distributional implications of this phenomenon, we develop a quantifiable general equilibrium model of trade and MP. Specialization is endogenously determined as a result of comparative advantage and home market effects (HME) that arise from the interaction between increasing returns to innovation and geographical frictions. The model yields simple structural expressions for bilateral trade and MP that we use to calibrate it across a set of OECD countries. Comparative statics exercises reveal that the reduction in the cost of MP or the integration of China into the world economy may hurt countries that are driven to specialize in production due to HMEs, although these losses tend to be very small. Contrary to popular fears, we find that production workers gain even in countries that further specialize in innovation.

Suggested Citation

Arkolakis, Costas and Ramondo, Natalia and Ramondo, Natalia and Rodríguez-Clare, Andrés and Yeaple, Stephen R., Innovation and Production in the Global Economy (April 2013). NBER Working Paper No. w18972. Available at SSRN: https://ssrn.com/abstract=2254225

Costas Arkolakis (Contact Author)

Yale University - Department of Economics ( email )

28 Hillhouse Ave
New Haven, CT 06520-8264
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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Yale University - Cowles Foundation

Box 208281
New Haven, CT 06520-8281
United States

Natalia Ramondo

University of California, San Diego (UCSD) - Graduate School of International Relations and Pacific Studies (IRPS) ( email )

9500 Gilman Drive
La Jolla, CA 92093-0519
United States

Natalia Ramondo

Arizona State University ( email )

Tempe, AZ 85287-3806
United States

Andrés Rodríguez-Clare

University of California, Berkeley - Department of Economics ( email )

579 Evans Hall
Berkeley, CA 94709
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Stephen R. Yeaple

Pennsylvania State University - College of the Liberal Arts - Department of Economic ( email )

524 Kern Graduate Building
University Park, PA 16802-3306
United States
8148655452 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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