In brief: Heterogeneous firms in international trade

Stephen Redding reports on a conference jointly organised by CEP's globalisation programme.

Theories of Heterogeneous Firms and Trade

This paper reviews the recent theoretical literature on heterogeneous firms and trade, which emphasizes firm selection into international markets and reallocations of resources across firms. We discuss the empirical challenges that motivated this research and its relationship to traditional trade theories. We examine the implications of firm heterogeneity for comparative advantage, market size, aggregate trade, the welfare gains from trade, and the relationship between trade and income distribution. While a number of studies examine the endogenous response of firm productivity to trade liberalization, modelling internal firm organization and the origins of firm heterogeneity remain interesting areas of ongoing research.Heterogeneous firms, international trade, within-industry reallocation, selection into exporting

Specialization dynamics.

This paper proposes a new empirical framework for analyzing specialization dynamics. A country’s pattern of specialization is viewed as a distribution across sectors, and statistical techniques for analyzing the evolution of this entire distribution are employed. The empirical framework is implemented using data on 20 industries in 7 OECD countries since 1970. We find substantial mobility in patterns of specialization. Over time horizons of 5 years, this is largely explained by forces common across countries including world prices and common changes in technical efficiency. Over longer time horizons, country-specific changes in factor endowments become more important. There is no evidence of an increase in countries’ overall degree of specialization.

The Empirics of New Economic Geography

Although a rich and extensive body of theoretical research on new economic geography has emerged, empirical research remains comparatively less well developed. This paper reviews the existing empirical literature on the predictions of new economic geography models for the distribution of income and production across space. The discussion highlights connections with other research in regional and urban economics, identification issues, potential alternative explanations and possible areas for further research.New economic geography, market access, industrial location, multiple equilibria

Location, location, location

How important is access to markets as a driver of economic prosperity? In new research, Stephen Redding and Daniel Sturm address this question by analysing the post-war division of Germany and its impact on the border cities in the West suddenly cut off from their nearby trading partners

The costs of remoteness: evidence from German division and reunification

This paper exploits the division of Germany after the Second World War and the reunification of East and West Germany in 1990 as a natural experiment to provide evidence of the importance of market access for economic development. In line with a standard new economic geography model, we find that following division cities in West Germany that were close to the new border between East and West Germany experienced a substantial decline in population growth relative to other West German cities. We provide several pieces of evidence that the decline of the border cities can be entirely accounted for by their loss in market access and is neither driven by differences in industrial structure nor differences in the degree of warrelated destruction. Finally, we also find some first evidence of a recovery of the border cities after the re-unification of East and West Germany

Educational Attainment, Labour Market Institutions, and the Structure of Production

A key feature of OECD economic growth since the early 1970s has been the secular decline in manufacturing's share of GDP and the secular rise of service sectors. This paper examines the role played by relative prices, technology, factor endowments, and labour market institutions in the process of "de- industrialization." We find a statistically significant and quantitatively important effect of levels of educational attainment. Furthermore, the production structure responds differently to the educational attainment of men and women. Finally, countries with stronger levels of employment protection are shown to adjust more slowly to changes in prices, technology, and factor endowments.De-industrialization, Educational Attainment, Factor Endowments, Labour Market Institutions,Specialization

Evolving patterns of international trade.

Theoretical models of growth and trade suggest that patterns of international specialization are dynamic and evolve endogenously over time. Initial comparative advantages are either reinforced or gradually unwound with the passage of time. This paper puts forward an empirical framework for modeling international trade dynamics that uses techniques widely employed in the cross-country literature on income convergence. On applying this framework to industry-level data, evidence is found for significant differences in international trade dynamics among the G-5 economies.

Location, location, location.

How important is access to markets as a driver of economic prosperity? In new research, Stephen Redding and Daniel Sturm address this question by analysing the post-war division of Germany and its impact on the border cities in the West suddenly cut off from their nearby trading partners.