International Trade, Offshoring and Heterogeneous Firms

24 Pages Posted: 10 Jan 2011 Last revised: 20 Jan 2011

See all articles by Richard Baldwin

Richard Baldwin

National Bureau of Economic Research (NBER)

Toshihiro Okubo

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

Date Written: January 2011

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 due to 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 big 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 big-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 and Okubo, Toshihiro, International Trade, Offshoring and Heterogeneous Firms (January 2011). NBER Working Paper No. w16660, Available at SSRN: https://ssrn.com/abstract=1737208

Richard Baldwin (Contact Author)

National Bureau of Economic Research (NBER) ( email )

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United States

Toshihiro Okubo

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

PO Box 136
Geneva, CH-1211
Switzerland
+41 22 908 5900 (Phone)

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