International Trade, Offshoring and Heterogeneous Firms

14 Pages Posted: 15 Jan 2014

See all articles by Richard E. Baldwin

Richard E. Baldwin

University of Geneva - Graduate Institute of International Studies (HEI); Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Toshihiro Okubo

Keio University

Date Written: February 2014

Abstract

Recent trade models determine the equilibrium distribution of firm‐level efficiency endogenously and show that freer trade shifts the distribution towards higher average productivity because of entry and exit of firms. These models ignore the possibility that freer trade also alters the firm‐size distribution via international firm migration (offshoring); firms must, by assumption, produce in their “birth nation.” We show that when firms are allowed to switch locations, new productivity effects arise. Freer trade induces the most efficient small‐nation firms to move to the large nation. The large country gets an “extra helping” of the most efficient firms while the small nation's firm‐size distribution is truncated on both ends. This reinforces the large‐nation productivity gain while reducing or even reversing the small‐nation productivity gain. The small nation is nevertheless better off allowing firm migration.

Suggested Citation

Baldwin, Richard E. and Okubo, Toshihiro, International Trade, Offshoring and Heterogeneous Firms (February 2014). Review of International Economics, Vol. 22, Issue 1, pp. 59-72, 2014. Available at SSRN: https://ssrn.com/abstract=2379177 or http://dx.doi.org/10.1111/roie.12096

Richard E. Baldwin (Contact Author)

University of Geneva - Graduate Institute of International Studies (HEI) ( email )

PO Box 136
Geneva, CH-1211
Switzerland
+41 22 908 5933 (Phone)
+41 22 733 3049 (Fax)

HOME PAGE: http://www.hei.unige.ch/~baldwin/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Toshihiro Okubo

Keio University ( email )

2-15-45 Mita
Minato-ku
Tokyo, 108-8345
Japan

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