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Productivity enhancing trade through local fragmentation

Sugata Marjit, Xinpeng Xu and Lei Yang

International Review of Economics & Finance, 2019, vol. 60, issue C, 292-301

Abstract: Mechanisms linking trade and productivity are rarely discussed in well accepted trade-theoretic literature although such a link is critical especially for understanding how trade helps developing countries. We restructure the standard neo-classical model of trade to provide a clear mechanism that leads to productivity enhancement in the export sector. As trade in labor-abundant countries reduces the real return to capital due to Stolper-Samuelson hypothesis, entrepreneurs find it easier to establish new businesses as capital costs decline. A section of workers becomes entrepreneurs producing and supplying cheaper intermediate goods to the export sector. Expanding export sector helps such a process, whereas contracting import-competing sector does not. New entrepreneurs boost the productivity of the export sector by supplying low-cost input. Here a boost in entrepreneurship induced by a decline in capital cost increases productivity of the export sector. Thus, this paper establishes a different and novel link between trade and productivity.

Keywords: Trade liberalization; Vertical separation; Entrepreneurship; Productivity (search for similar items in EconPapers)
Date: 2019
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