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Asymmetric effects of trade and FDI : South America versus Europe
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1830-7728
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EUI MWP; 2015/16
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ALLUB, Lian, Asymmetric effects of trade and FDI : South America versus Europe, EUI MWP, 2015/16 - https://hdl.handle.net/1814/36615
Abstract
The gains from openness to trade and multinational production (MP) depend largely on country size. A large country may attract more foreign firms by closing itself to trade, while a small country may attract a larger amount of MP if trade costs with its neighbors are low because it can be used as an export platform. I develop a model to study these effects, where firms face non-convex decisions of whether to serve a foreign country by exporting from the home country, exporting from a third country, or producing in the foreign country. I calibrate the model separately for South America and Europe. I find that the gains from openness in Europe are double those in South America, and that the distribution of these gains varies less with size in South America. I also find that MP is more important in explaining the gains from openness in large countries, but the export platform mechanism is more important in small countries. Finally, I find that trade and MP have important implications for the size distribution of firms.