Essays on Trade and Technological Change

Abstract

This collection of essays examines the effects of international trade on individual firms and welfare when the firms' production technologies change over time, and when they are constrained by frictions in financial markets.

Chapter 1 shows that international trade can arise from the combination of sectoral differences in the capital intensity of production and differences across countries in financial development. I extend a Heckscher-Ohlin model of trade by introducing financial frictions that distort the capital allocation between firms of varying productivity levels. Countries that are more financially developed, and thus better able to channel capital to the best firms, have a comparative advantage in capital intensive industries. If individual productivity is time-varying and entrepreneurs can trade assets, inter-sectoral trade increases gradually after trade liberalization. In a calibrated model, I find that trade arises from an expansion of the number of producers in the comparative advantage sector in the short run, but from a reallocation of equity across sectors in the long run.

Chapter 2 investigates the welfare consequences of trade liberalization when firms' individual production costs vary over time. The set of firms that participate in international trade is not fixed, but rather changes in response to varying prices and costs. When forward-looking firms experience shocks to productivity after entry, lower trade costs not only increase the profits of firms currently exporting, but also the value of non-exporters that might one day choose to enter foreign markets. I show how conventional measures of the welfare effects of trade must be adjusted and quantify the size of these adjustments for the US economy.

While chapter 2 assumes that producers have no control over their own production costs, chapter 3 examines an environment in which they invest in innovation. Using a dataset of establishments in India's manufacturing sector, I show that small producers grow faster, and with more variance, than larger ones. I then build a model of technology adoption that can explain this pattern, and I demonstrate how the growth of small firms changes the value of exporting.