Firm heterogeneity and the localization of economic activities

Abstract

This paper examines how market access strategies, export and FDI, respond to changes in level of integration. Empirical evidence shows that both firm exports and multinational activity are affected by trade liberalization episode. To account for the strong positive correlation between export and FDI, we develop a general equilibrium model that features firm heterogeneity, trade and FDI with final and intermediate products. Different geographical spaces are considered to quantify the effect of a preferential trade agreement (PTA) on supply mode decisions, for both partner and excluded countries. The model sheds new light on the mechanisms through which geography reshapes the concentration of economic activities inside and outside the PTA area.JEL classification: F12; F15; F23; R12