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JobMarket Seminar
University of Colorado at Boulder
21-Dec-2018
Seminar 3 – 12:00
This paper highlights the importance of considering the size of barriers to both trade and FDI when analyzing the effects of globalization on economic growth. A two-country model of endogenous growth with step-by-step innovation and oligopolistic competition, where firms serve their foreign market via exports or horizontal FDI, shows that the process of international competition equalizes long-run growth across countries. Growth depends on the innovation rates of individual firms and the distribution of industries over international technological differences. A quantitative analysis of the model based on some long-run salient features of high-income countries shows that the effects of changes in trade barriers on economic growth vary with the size of barriers to FDI. Bilateral trade liberalization from high to moderate barriers increases growth from 1.79% to 2.33% when FDI barriers are high, but leaves growth unaffected when FDI barriers are low. Further liberalization towards free trade decreases growth for both high and low FDI barriers because of an excessive-competition effect. Unilateral movements to higher or lower trade protection when trade and FDI costs are low decrease growth in both countries through an additional relative-market-size effect.