Globalization and Productivity in The Developing World

Reto Foellmi and Manuel Oechslin

Papers from World Trade Institute

Abstract: We explore the impact of international trade in a monopolistically competitive economy that encompasses technology choice and an endogenous distribution of mark-ups due to credit frictions. We show that in such an environment a gradual opening of trade may but not necessarily must have a negative impact on productivity and overall output. The reason is that the pro-competitive effects of trade reduce mark-ups and hence make access to credit more difficult for smaller firms (an implication we substantiate using firm-level data from Latin America). As a result, smaller firms - while not driven out of the market - may be forced to switch to less productive technologies. Our framework matches several salient patterns in the empirical literature on the impact of trade in developing countries.

Date: 2014-04-30
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Working Paper: Globalization and Productivity in the Developing World (2012)
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