The Economic Effects of International Openness with Firm Heterogeneity
Wu, Tommy Tung On
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This dissertation adds to the literature on international openness and economic growth by studying and quantifying the effects of openness to trade and multinational production using a model of endogenous innovation with firm heterogeneity. The first chapter discusses the contribution of this dissertation to the theoretical and empirical literature on international openness. The second chapter studies and quantifies the long-run effects of openness to trade and multinational production in the context of advanced economies using a model of endogenous innovation with firm heterogeneity. Counterfactual experiments conducted using a calibrated version of a theoretical model find that the US would experience a significant welfare cost in consumption terms by restricting openness to both trade and horizontal multinational production with other OECD countries, with the growth effect accounting for a substantial part of the cost. Chapter Three extends the theoretical model presented in Chapter Two to include features specific to the North-South context. I show that allowing for the possibility that the South may switch from being an imitator to becoming an innovator is essential for examining the long-run growth effect of stronger intellectual property rights. In particular, the North and the South both prefer stronger intellectual property rights because this will achieve the fastest long-run economic growth. If the South is an imitator country, the North needs to maintain its absolute advantage in technology creation by maintaining a sufficiently large pool of uncopied ideas. Otherwise both countries will fall into a slow-growth equilibrium in the long run. In Chapter Four, I account for transitional dynamics and study the gains from openness and stronger intellectual property rights that arise in the North-South context. Counterfactual experiments based on a calibrated version of the model presented in Chapter Three find that the transitional welfare gains from further trade openness between China and the OECD countries can be significant. In contrast to the existing growth literature, a deterrence of imitation has limited welfare effects when the South can switch from being an imitator to becoming an innovator country. This points to a source of potential bias in the welfare estimates provided by the existing literature.