Trade and Growth with Heterogeneous Firms

Abstract

This paper explores the impact of trade on growth when firms are heterogeneous. Our findings can be viewed as relevant to the trade and growth literature on one hand and the heterogeneous-firms trade theory on the other. Our main finding - that freer trade is both anti-growth and welfare worsening from a purely dynamic perspective - contrasts with most findings in the endogenous growth literature. We also show that market-entry costs are anti-growth, but heterogeneity per se is pro-growth. As concerns the heterogeneous-firms literature our main finding is a static-vs.-dynamic trade-off in terms of productivity gains. Freer trade raises measured productivity in a level sense but slows measured productivity growth.

Keywords: Trade and endogenous growth, heterogeneous firms, dynamic versus static efficiency

JEL Classification: H32, P16