Browsing by Author "Bogatskly, Gleb"

The actual cross-country heterogeneity with respect to costs, scales and abilities produces a number of essential questions concerning the influence of trade openness on endogenous growth. Among them, I highlight the following: • What are the effects of heterogeneity on the endogenous growth with international trade? • How is openness connected with endogenous growth and welfare, with heterogeneity? • Are the results ambiguous and what policy measures avoid uncertainty? • Is there an optimal rate of trade openness? The importance of these questions is inevitably growing with further integration in the world economy, as well as speeding diversification of technologies. To study these questions I use a number of models, especially those suggested by Baldwin and Robert-Nicoud (2008) and Hirose and Yamamoto (2006). The original approaches to analysis are based on the product-innovation endogenous growth models by Grossman and Helpman (1991) and Romer (1990). In the endogenous growth models with symmetric firms, including Grossman and Helpman (1991), lower trade barriers promote growth through lower production and innovation costs. This connection turns out to be non-monotonic when heterogeneity is introduced. I focus on the cases when the heterogeneity is produced by marginal production costs and by the firms ability to absorb international knowledge spillovers. When firms are heterogeneous across the two countries with respect to their marginal production costs, a freer trade boosts the costs of variety introduction through the selection effects, though there is still a pro-growth effect through the decreasing marginal cost of innovation activity. Which effect outweighs the other one, depends on the innovation technology. Due to international knowledge spillovers, innovation costs in each country decrease in the total number of the innovating firms in the two countries, and the growth speeds up. If the knowledge spillovers are symmetric, the innovation costs will be lower in the country with a larger market. However, when firms are heterogeneous in their ability to absorb spillovers, the country with a smaller market can attract the majority of innovating firms, if it is more capable of learning. In this case, lower trade barriers lead to a slower growth. Various forms of cross-country heterogeneity produce ambiguity in the effects of trade liberalization upon growth. This obliges the governments to search flexible trade policies to maximize growth at each time keeping trade also beneficial for the countries welfare. I describe the essential points that must be taken into account by the policy-makers, and suggest the existence of an optimal rate of trade openness.