FDI Policy,Greenfield Investment and Cross‐border Mergers

This paper examines a multinational's choice between greenfield investment and cross‐border merger when it enters another country via foreign direct investment (FDI) and faces the host country's FDI policy. Greenfield investment incurs a fixed plant setup cost, whereas the foreign firm obtains only a share of the joint profit from a cross‐border merger under the restriction of the FDI policy. This trade‐off is affected by market demand, cost differential, and market competition, among other things. The host country's government chooses its FDI policy to affect (or alter) the multinational's entry mode to achieve the maximum social welfare for the domestic country. We characterize the conditions shaping the optimal FDI policy and offer intuitions on FDI patterns in developing and developed countries.     

Regulatory Entry Barriers,Rent Shifting and the Home Market Effect

This paper introduces regulatory entry barriers in a model of the home market effect. The entry barriers generate local rents that have unexpected but significant implications. First, the home market effect is magnified. Second, when countries are sufficiently unequal in size and rents are sufficiently large, symmetric reductions in trade costs reduce welfare in the small country. Third, entry barriers increase the large country's market size and, surprisingly, can increase its welfare. Fourth, a unilateral increase in trade protection shifts foreign rents to the home country. This rent‐shifting effect amplifies the standard production relocation motive for trade policy intervention.     

Trade Imbalance and Domestic Market Competition Policy

This study investigates the effect of a country's suppression of competition in its market for nontradables. It assumes that the initial equilibrium is stationary and demonstrates that if competition is suppressed in a small country, the country's trade surplus increases in the short run. In the large country case, the same change creates an excess demand for future tradables and affects the relative price between present and future tradables. Using a two‐country model, the study shows that this price change redistributes real wealth from the country with a trade deficit to the country with a trade surplus.     

Can country trade flows benefit from improved corporate social responsibility ratings?

We set out in this study to examine the effects of country ‘corporate social responsibility’ (CSR) ratings on the international trade flows of 28 countries. Drawing on categorization theory, we examine whether country CSR engagement is a categorizing factor capable of influencing the overall process of categorization. Based upon a two-stage approach, comprising of gravity and panel Tobit models, we find that a country's CSR rating has significantly positive effects on the country's international trade flows. When the CSR rating of a country is higher than that of another rival trading country, this will have significantly positive effects on the bilateral trade flows between the two countries.     

The Effects of Trade Liberalization between Heterogeneous Countries on Endogenous Mergers

This paper examines the effects of trade liberalization on merger behavior. We endogenize merger choice among owners in an oligopolistic industry in asymmetric countries to analyze the consequences of trade cost reductions on competitiveness and welfare. In this context, the non‐cooperative game supports asymmetric market structures. We also find that trade liberalization is not necessarily pro‐competitive in countries with the competitive advantage, even if trade costs are completely abolished. Moreover, the tariff‐jumping explanation of international mergers does not necessarily apply. The welfare analysis shows that merger behavior can significantly alter any gains from liberalization. Countries should consider enforcing competition in regional agreements. Specifically, to avoid a reduction in domestic welfare following trade‐liberalizing reductions in trade costs, a high‐cost country's optimal policy may be to ban international mergers.     

Endogenous Comparative Advantage*

We develop a model of trade between identical countries. Workers endogenously acquire skills that are imperfectly observed by firms; therefore, firms use aggregate country investment as the prior when evaluating workers. This creates an informational externality interacting with general equilibrium effects on each country's skill premium. Asymmetric equilibria with comparative advantages exist even when there is a unique equilibrium under autarky. Symmetric, no‐trade equilibria can be unstable under free trade. Welfare effects are ambiguous: trade can be Pareto‐improving even if it leads to an equilibrium between rich and poor countries, with no special advantage regarding country size.     

Free Trade Agreement and Vertical Trade with a Manufacturing Base

We examine the effects of free trade agreement (FTA) on tariffs and welfare in a three‐country model with vertical trade, where an FTA is formed between a country exporting a final good whose production involves using an intermediate good, and a country exporting the intermediate good in exchange for the final good. We demonstrate that the FTA reduces its member country's external tariff, whereas it raises the non‐member country's tariff. The non‐member country unambiguously becomes better off. In contrast, the FTA may or may not make its member countries better off. This implies that the formation of an FTA may not always be Pareto‐improving.     

ENDOGENOUS FLUCTUATIONS IN TWO‐COUNTRY MODELS*

This paper investigates the interlinkage in the business cycles of large‐country economies in a free‐trade equilibrium. We consider a two‐country, two‐good, two‐factor general equilibrium model with Cobb‐Douglas technologies and linear preferences. We also assume decreasing returns to scale in the consumption good sector. We first identify the determinants of each country's global accumulation pattern in autarky equilibrium, and secondly we show how a country's business cycles may spread throughout the world once trade opens. We thus give capital intensity conditions for local and global stability of competitive equilibrium paths.     

FDI and Outsourcing in a Service Industry: Welfare Effects of Liberalising Trade and Investment

This study examines a foreign firm's entry decision and its effects on the host country's welfare in a model with a composite good in which both commodity and service generate utility for consumers. Along with the commodity it produces, a producer can provide the service by itself or outsource the service. The result shows that the incentive for foreign direct investment (FDI) in the service sector increases under liberalising trade in the final‐good market. Moreover, there exist policy combinations of trade and investment liberalisation, whereby the domestic firms' profitability is traded off with the host country's social welfare when the foreign firm provides a service through FDI or through outsourcing, respectively. Finally, the welfare after simultaneously liberalising trade and investment is not necessarily greater than that under autarky.     

Access to credit and comparative advantage

Access to external funds is crucial for the entry and expansion of entrepreneurial firms and the sectors they predominantly arise in. This paper reports three important results. First, comparative advantage is shaped by factor endowments as well as fundamental determinants of corporate finance. In particular, a larger equity ratio of firms and tough governance standards relax financing constraints, lead to entry of firms at the lower bound of the productivity distribution and create an endogenous comparative advantage in sectors where entrepreneurial firms are clustered. Second, a small degree of protection in the constrained sector can raise a country's welfare by relaxing financing constraints if terms‐of‐trade effects are small. Third, a small degree of protection of the financially dependent industry in a financially underdeveloped country might even raise world welfare.     

PROFIT TAX AND FIRM MOBILITY IN A THREE‐COUNTRY MODEL

We construct a three‐country model that incorporates international relocation by imperfectly competitive firms and examine both the effects of each country's profit tax reduction on the consumption and welfare of all countries, and the incentive for the countries to decrease the profit tax. In such a model, both the terms of trade and international relocation of firms offer the key to understanding the impacts of one country's profit tax policy. In particular, we note that the relocation of firms from the other two countries is positively related to the wage incomes of the third country through a shift in labour demand, and the terms‐of‐trade improvement is not only positively related to the wage incomes, but also negatively related to profit incomes through a shift in world consumption demand. We show that (i) in a three‐country world economy, regardless of the reduction's source, the profit tax reduction of each country leads to relocation of firms away from foreign countries toward its own economy and deteriorates the terms of trade of its economy and (ii) this becomes a ‘beggar‐thy‐neighbour’ policy in the sense that it lowers the welfare of the other foreign countries.     

Should Smaller Countries Be More Protectionist? The Diversification Motive for Tariffs

This paper examines the diversification motive for tariffs under trade‐related uncertainty when there is incomplete international and domestic risk sharing. In the context of a two‐country Ricardian continuum‐of‐sectors model with shocks to foreign technologies or preferences, tariffs allow a country to mitigate external risk by diversifying across sectors. Given sufficiently high risk and risk aversion, the optimality of tariffs depends primarily on a country's ability to diversify, rather than its market power, such that small countries gain most.     

International Environmental Permit Trade and Debt: the Consequences of Country Sovereignty and Cross-Default Policies*

We investigate the joint occurrence of international intertemporal trade and international environmental-permit trade, both of which are subject to country sovereignty. Assuming that side payments cannot be made to keep a debtor country from terminating international environmental cooperation, we analyze the impact of these two trade opportunities on a debtor country's incentive to continue environmental cooperation. We also show how, by way of a suitable strategic linkage between debt and permit trade, the public good of ensuring continued environmental cooperation can be provided by the supply side of private international loans.     

The Choice of an Optimal Exchange Rate System for a Small Country Under the three Good and three Country Model

The purpose of this paper is to analyze the problem of the choice of an optimal exchange rate system for a small country in terms of insulation from foreign real and monetary disturbances and in terms of minimizing the output variance around desired output. We employ a simple open macroeconomic model which can represent a small country's economy where the production of domestic output is dependent upon the intermediate goods from the rest of the world and where there are a variety of controls over foreign exchange and capital flows by a monetary authority. [420]     

Per capita income and the extensive margin of bilateral trade

This paper quantitatively explores the role of demand in explaining the positive correlation between an importer's per capita income and the extensive margin of bilateral trade. The theoretical mechanism is based on agents that increase the set of goods they consume with income. This affects the structure of a country's import demand and therewith the extensive margin of trade. We formalize this intuition by incorporating preferences that allow for binding non‐negativity constraints into an otherwise standard Ricardian multi‐country model. We quantify the model and find that the behaviour of the model's extensive margin of trade is consistent with the data.     

Trade Liberalization and Environmental Regulation on International Transportation

Incorporating pollution emissions from international transportation into a model of strategic trade and environmental policies, we investigate the effect of trade liberalization and environmental regulation on national welfare and the environment. Our model includes imperfectly competitive markets for international transportation and final products. We find that trade liberalization may reduce each country's welfare unless some level of environmental regulation on international transportation is in place. When international trade is liberalized initially, a mutual increase in the common emission tax rates may improve each country's welfare. However, when international trade is highly protected initially, imposing an emission tax may reduce welfare.     

Transboundary Pollution and International Migration

We analyze the welfare effects of international migration in the presence of transboundary pollution. We use a simplified Copeland and Taylor (1999) model, where the (developed) home country's pollution abatement technology is superior to that of the (less developed) foreign country. If there is no trade, workers will migrate from the foreign country to the home country. The foreign country gains from migration, but whether the home country gains or not depends on the abatement‐technology gap and the magnitude of the coefficient of transboundary pollution. World welfare will increase under migration. If there is free trade in goods, international migration occurs when the home country specializes in the production of the environmentally sensitive good. In this case, migration will result in increased production of the manufactured good and increase the level of world pollution.     

International Trade,Offshoring and Heterogeneous Firms

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.     

Welfare and Integration

This article argues that the terms‐of‐trade and volume‐of‐trade taxonomy from the theory of tariffs constitutes an attractive alternative to Viner's trade diversion and creation effects for the analysis of preferential trading arrangements. In applications of the alternative approach, the article establishes that results by Lipsey and Riezman on large versus small preunion trade flows for choice of partners are not ‘contradictory’ and that under some conditions a small country's optimal strategy is to seek membership of multiple free‐trade areas.     

Endogenous Imitation and Technology Absorption in a Model of North–South Trade

Abstract

This paper considers the transfer of technology from the North to the South that occurs through trade in high-technology goods and explicitly models the ‘reverse-engineering’ process that allows the South to assimilate new technologies. A key finding of this study is that the South's rate of growth is dictated by the size of the country's human capital, which determines its absorptive capacity and its ability to assimilate knowledge from the North. We find that while a Southern country that is poor in human capital can only imitate, Southern countries that possess sufficiently large human capital endowments, beyond a certain threshold, signal the onset of innovation. We also find that the North enjoys a higher rate of innovation and growth with trade than without. North's gains are the highest when it trades with a human-capital ‘poor’ South, because imitation increases South's demand for Northern intermediates. But trade with the Southern countries that are human capital rich (and therefore involved in innovation), dampens their demand for Northern imports, adversely affecting North's growth. The model predicts growth convergence between the North and a South that is well passed the threshold for innovation.