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Asymmetric effects of trade and FDI: South America versus Europe

Lian Allub ()

No MWP2015/16, Economics Working Papers from European University Institute

Abstract: The gains from openness to trade and multinational production (MP) depend largely on country size. A large country may attract more foreign firms by closing itself to trade, while a small country may attract a larger amount of MP if trade costs with its neighbors are low because it can be used as an export platform. I develop a model to study these effects, where firms face non-convex decisions of whether to serve a foreign country by exporting from the home country, exporting from a third country, or producing in the foreign country. I calibrate the model separately for South America, and Europe. I find that the gains from openness in Europe are double those in South America, and that the distribution of these gains varies less with size in South America. I also find that MP is more important in explaining the gains from openness in large countries, but the export platform mechanism is more important in small countries. Finally, I find that trade and MP have important implications for the size distribution of firms.

Keywords: Trade; Multinational Production; Bridge Multinational Production; South America; Europe (search for similar items in EconPapers)
JEL-codes: F12 F15 F23 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-int
Date: 2015
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