Firm Dynamics and Trade

Abstract

We review the literature that studies the dynamics of firms in foreign markets, at both the intensive and extensive margins, and their aggregate implications. We first summarize a set of micro facts on exporter entry, expansion, contraction, and exit and several macro facts about the response of aggregate trade flows to trade-policy and business-cycle shocks. We then present the canonical model developed to account for these facts and discuss its connection to the empirical evidence. We show how three model features—future uncertain profits, an investment in market access, and high depreciation of that access upon exit—generate transition dynamics and long-run aggregate outcomes from a cut in tariffs. The model and its extensions contribute to our understanding of trade integration and the evolution of future trade barriers. We discuss the key challenges faced by the canonical model, its possible extensions, and applications of the framework to recent global events. Expected final online publication date for the Annual Review of Economics, Volume 13 is August 2021. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.

The role of firm‐to‐firm relationships in exporter dynamics

“…More generally, this paper contributes to a large body of empirical research on how exporters become large and successful in new markets. These studies document that firms grow through the extensive and intensive margins (for a review, see Alessandria et al 2021), network effects (Buus 2019;Eaton et al 2021) or price dynamics (Bastos et al 2018;Rodrigue and Tan 2019;Berman et al 2019;Piveteau 2021). My findings extend this literature by showing that firms may also grow by adding new customers and reducing their prices in a customer relationship.…”

“…These studies document that firms grow through the extensive and intensive margins (for a review, see Alessandria et al . 2021), network effects (Buus 2019; Eaton et al . 2021) or price dynamics (Bastos et al .…”

The Long and Short (Run) of Trade Elasticities

“…Since our econometric estimates identify a partial elasticity this framework fits tightly with the empirics. The recent literature on trade dynamics is rich in both substantive mechanisms and quantification (see, among many others, Costantini and Melitz, 2007;Ruhl, 2008;Drozd and Nosal, 2012;Burstein and Melitz, 2013;Alessandria and Choi, 2014;Alessandria, Choi, and Ruhl, 2021;Ruhl and Willis, 2017;Blaum, 2019;Fitzgerald, Haller, and Yedid-Levi, 2016;Leibovici and Waugh, 2019;Alessandria, Arkolakis, and Ruhl, 2021;Steinberg, 2022). The goal of this section is not to revisit all of the proposed mechanisms for gradual adjustment of trade.…”

On GVC and innovation: the moderating role of policy

“…While the nexus between trade in final goods and innovation has been examined (Ackigit & Melitz, 2021 ; Alessandria et al, 2021 ; Keller, 2004 ), GVC participation is also likely to have a knowledge driven effect. Indeed, backward participation linkages to GVC transmit embedded foreign knowledge to destination countries that can be signaled by countries’ innovation performance.…”