Global Value Chains, Horizontal Intra-Industry Trade and the Heterogeneous Firm

Sven W. Arndt ()
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Sven W. Arndt: Robert Day School of Economics and Finance, Claremont McKenna College, Claremont, CA 91711, USA

Frontiers of Economics in China-Selected Publications from Chinese Universities, 2018, vol. 13, issue 1, 68-82

Abstract: This paper examines global value chains at the level of the heterogeneous firm. The context is a world of horizontal intra-industry trade, characterized by imperfect competition and product differentiation at the firm level. Standard microeconomic tools are employed to assess the effects of inter-firm dissimilarities in both demand and supply on firms¡¯ responses to changes in trade policy. In this set-up, dissimilarities in firm characteristics play roles similar to factor endowments and technology differences in traditional trade models. When cross-border production sharing (¡°fragmentation¡±) is introduced into this framework, those differences in firm characteristics determine the degree to which individual firms will enter into production networks. In this context, horizontal and vertical intra-industry trade elements interact in their effects on firm decisions. Traditional comparative advantage considerations still govern the choice of off-shored activities, while direct competition between imports and exports expands the range of possible outcomes. Finally, it is shown that cross-border production sharing reduces the sensitivity of firms to variations in exchange rates, matching a phenomenon that has been observed in traditional country-level models.

Keywords: heterogeneous firms; global value chains; intra-industry trade; intra-product; specialization; exchange-rate elasticities (search for similar items in EconPapers)
JEL-codes: D21 D43 F11 F12 F31 (search for similar items in EconPapers)
Date: 2018
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