Trade and mergers in the presence of firm heterogeneity

We investigate the role of firm heterogeneity in considering profitability and desirability of mergers in the international economy. Analysis shows that higher trade costs make only crossborder mergers profitable whereas larger firm heterogeneity is likely to increase both domestic and cross-border mergers. Furthermore, it is shown that whether or not a merger leads to merger waves depends on the types of firms involved in it. It is also demonstrated that larger firm heterogeneity can reduce the discrepancy between profitability and desirability of mergers when the trade cost is sufficiently low.M&As, trade, firm heterogeneity, Cournot competition

Home market effect, regulation costs and heterogeneous firms

This paper studies how market-specific entry sunk costs (regulation costs) affect the Home Market Effect (HME) with firm heterogeneity in marginal costs. our model is based on the Dixit-Stiglitz monopolistic competition model with firm heterogeneity plus regulation costs difference. We find that a regulation costs gap works as dispersion force by inducing a market potential gap, which reduces the HME and could cause the reverse HME or the anti-HME. The HME first rises and then fall in terms of trade openness, whereas the HME rises in terms of regulation costs gap coordination by technical barriers to trade (TBT) agreements. Firm heterogeneity dampens the dispersion force by the regulation costs difference and thus works as an agglomeration force. Firm heterogeneity causes a perfect spatial sorting, in which a large country attracts only high productivity firms, and vice versa.Home market effect, firm heterogeneity, regulation costs, technical barriers to trade.

Firm Heterogeneity, Credit Constraints, and Endogenous Growth

This paper is concerned with the role of firm heterogeneity under credit constraints for economic growth. We focus on firm size, innovativeness and credit constraints in a semi-endogenous growth model reflecting recent empirical findings on firm heterogeneity. It allows for an explicit solution for transitional growth and balanced growth path productivity as well as the growth maximizing firm heterogeneity. This enables us to draw inference about the impact of key policy parameters of the model on these quantities and to draw conclusions about firm and capital market related policies.firm heterogeneity, credit constraints, firm size, SME, economic growth

Home Market Effect and Regulation Costs - Homogeneous Firm and Heterogeneous Firm Trade Models

This paper studies how market-specific entry sunk costs (regulation costs) affect the Home Market Effect (HME) with firm marginal costs heterogeneity. Our model is based on the Dixit-Stiglitz monopolistic competition model with firm heterogeneity plus regulation costs difference. We find that a regulation costs gap works as dispersion force by inducing a market potential gap, which reduces the HME and could cause the reverse HME or the anti-HME. The Home Market Magnification Effect (HMME) in terms of trade openness is hump-shaped, whereas the pro-HMME in terms of regulation costs coordination by technical barriers to trade (TBT) agreements can be found. Firm heterogeneity dampens the dispersion force by the regulation costs difference and thus works as an agglomeration force. Firm heterogeneity causes a perfect spatial sorting, in which a large country attracts only high productivity firms and vice versa.regulation costs, market potential, perfect spatial sorting, home market effect, home market magnification effect, firm heterogeneity, technical barriers to trade

Agglomeration, Trade and Selection

This paper studies how firm heterogeneity in terms of productivity affects the balance between agglomeration and dispersion forces in the presence of pecuniary externalities through a selection model of monopolistic competition with variable mark-ups. It shows that firm heterogeneity matters. However, whether it shifts the balance from agglomeration to dispersion or the other way round depends on its specific features along the two defining dimensions of diversity: 'richness' and 'evenness'. Accordingly, the role of firm heterogeneity in selection models of agglomeration cannot be fully understood without paying due attention to various moments of the underlying firm productivity distribution.agglomeration, trade, heterogeneity, selection, economic geography

Export platform FDI and firm heterogeneity

This paper investigates theoretically and empirically firms' productivity ranking among traditional horizontal foreign direct investment (HFDI), pure platform FDI (PFDI), and complex platform FDI (CFDI). Using data on Japanese outward FDI, we define firms conducting HFDI or PFDI as those Japanese firms that maintain production affiliates only in the U.S. or Mexico, respectively. The firms for CFDI are defined as having production affiliates in both the U.S. and Mexico. The theoretical illustration shows that the CFDI firms should have the highest productivity when trade costs between the U.S. and Mexico are low. By carefully disentangling firms' self-selection effects from learning-by-investing effects, we find some evidence consistent with this hypothesis for a period of relatively low trade costs. Our results indicate the importance of trade costs in developing countries with neighboring markets in attracting foreign investment by highly productive multinational firms.Mexico, Japan, United States, Foreign investments, Foreign affiliated firm, Exports, Costs, Export platform, FDI, Firm heterogeneity, Trade costs

Firm Heterogeneity, Trade, and Wage Inequality

This paper considers a world of two symmetric countries with two factors and two sectors. Outputs of the two sectors are imperfect substitutes and sectors differ in relative factor inten- sity. Each sector contains a continuum of heterogenous firms that produce differentiated goods within their sector. Trade is costly and there are both variable and fixed costs of exporting. The paper shows that under some plausible conditions supported by the data, trade between similar countries can increase the demand for skilled labor, which in turn increases the wage inequality between skilled and unskilled labor. The quantitative analyses suggest that such trade effects can explain up to 12 percent of the increase in the US skill premium.

Productivity And Firm Heterogeneity In Chile

We analyze productivity growth in Chilean manufacturing 1979-2000 using the newly available panel of establishments drawn from the Census of Manufacturing. We examine the contribution to productivity growth of ?internal? restructuring (such as new technology and organizational change among survivors) and ?external? restructuring (exit, entry and market share change). We find that (a) ?external restructuring? accounts for 52% of industry labour productivity growth and 57% of industry TFP growth; (b) much of the external restructuring effect comes from the closing down of poorly-performing plants due to import penetration, and (c) import penetration is also an important determinant of internal restructuring in the long term.Productivity, TFP, Firm, Chile

Firm Heterogeneity and Credit Risk Diversification

This paper considers a simple model of credit risk and derives the limit distribution of losses under different assumptions regarding the structure of systematic and idiosyncratic risks and the nature of firm heterogeneity. The theoretical results obtained indicate that if firm-specific risk exposures (including their default thresholds) are heterogeneous but come from a common parameter distribution, for sufficiently large portfolios there is no scope for further risk reduction through active credit portfolio management. However, if the firm risk exposures are draws from different parameter distributions, say for different sectors or countries, then further risk reduction is possible, even asymptotically, by changing the portfolio weights. In either case, neglecting parameter heterogeneity can lead to underestimation of expected losses. But, once expected losses are controlled for, neglecting parameter heterogeneity can lead to overestimation of risk, whether measured by unexpected loss or value-at-risk. The theoretical results are confirmed empirically using returns and credit ratings for firms in the U.S. and Japan across seven sectors. Ignoring parameter heterogeneity results in far riskier credit portfolios.risk management, correlated defaults, heterogeneity, diversification, portfolio choice

Models of Growth and Firm Heterogeneity

Although employment at individual firms tends to be highly non-stationary, the employment size distribution of all firms in the United States appears to be stationary. It closely resembles a Pareto distribution. There is a lot of entry and exit, mostly of small firms. This paper surveys general equilibrium models that can be used to interpret these facts and explores the role of innovation by new and incumbent firms in determining aggregate growth. The existence of a balanced growth path with a stationary employment size distribution depends crucially on assumptions made about the cost of entry. Some type of labor must be an essential input in setting up new firms.firm size distribution, organization capital, heterogeneous productivity, selection.