Globalisation , Productivity and Technology Research Paper 2005 / 18 Catching up or Pulling Away : Intra - Industry Trade , Productivity Gaps and Heterogeneous Firms

We develop a heterogeneous firm intra-industry trade model in which countries are asymmetric in both technology and size. In our model the productivity gaps and levels across countries are jointly determined by technological asymmetry and trade barriers. By assuming symmetry across countries, Melitz (2003)shows that increased exposure to IIT raise aggregate productivity for all countries via reallocation across heterogeneous firms. In this paper, we show that when countries are asymmetric, technological gap becomes a key determinant of the direction of the reallocation introduced by trade. While the technologically leading countries always reap productivity gains, the productivity effect of falling trade cost on the laggard country is ambiguous, depending on the magnitudes of technological gap as well as relative market size. The laggard will suffer from a productivity loss when the technological gap is too wide. However, the effect of increased exposure to IIT on productivity gaps across countries is unambiguous. In contrast to heterogeneous firm trade models absent of productivity uncertainty, we show that increased exposure to IIT will lead to a widening, rather than narrowing, of productivity gaps even if technological gaps is unaffected by trade. JEL classification: F12, L11