The Effect of Globalization in an Endogenous Growth Model with Firm
Heterogeneity, International Spillover, and Trade

Katsufumi Fukuda1

February 27, 2015
Abstract
This paper shows that increased trade liberalization elevates the growth rate if and only
if the beachhead cost for the foreign market is strictly lower than that for the domestic
market in an endogenous growth model with firm heterogeneity, international trade, andendogenous international spillover. Moreover, this condition is a sufficient condition forwelfare gain through further exposure to trade.
JEL Classification: F12, F15, O30, O33
Keywords: heterogeneous firms, endogenous international spillover, endogenous growth
model

1

Project Research Associate, Department of Economics, Hiroshima University, 1-2-1 Kagamiya,Higashihiroshima, Hiroshima 739-8526, Japan. E-mail: 2katsufumi.fukuda@gmail.com. Tel: +81-78803-7001.

1. Introduction
According to the World Bank (1995), maritime transportation cost decreased from1920 to 1990, albeit not monotonically, while air transportation cost decreased monotonically.
Hummels (2007) shows that, ad valorem, except in the mid-1980s and for the initial period
in the 2000s, air shipping and ocean shipping costs decreased between 1974 and 2004. Jackset al. (2011) show that trade costs for the U.S. fluctuated between 1950 and 1960, declined
between 1960 and 1980, and have increased since then. Except around the 1960s, trade costs
for the U.S. declined consistently, especially in the 1980s and the mid-1990s. How does tradeliberalization affect economic growth? According to empirical analyses, trade liberalization
affects growth positively or negatively. For example, Edwards (1998) finds that greater trade
openness led to higher growth rates for 93 countries between 1960 and 1990. 2 Yanikkaya(2003) finds that trade volume, including import and export, positively affects growtt, buttrade restrictions like tariff and export tax led to lower growth for 100 developed anddeveloping countries between 1970 and 1997. Dejong and Ripoll (2006) show that tradeliberalization has a positive (negative) growth effect among rich (poor) countries. Minier andUnel (2013) show that trade restriction represented by tariff affected growth ambiguously for
86 countries between 1985 and 2007.

2See Frankel and Romer (1999) and Sachs and Warner (1995).

Recent research has demonstrated that firm heterogeneity plays an important role ininternational trade. For example, different firms have different productivities within anindustry. Moreover, each firm exclusively chooses domestic or exporting firm who serve
domestic as well as foreign markets according to the levels of productivities. Following tradeliberalization, trade reallocates resources from the less productive to the more productive
exporting or non-exporting firms by shutting down the less productive firms and increasing
exports; thus, industrial productivity rises.3 Based on these empirical findings, Melitz (2003)
provides a monopolistically competitive model of trade with firm heterogeneity. Furthermore,
based on Melitz (2003), some economists focus on the effects of firm heterogeneity on
economic growth following trade liberalization. More recently, the effect of tradeliberalization on growth rate and welfare is examined in a trade model with firm heterogeneity.
Baldwin and Robert-Nicoud (2008) show that trade liberalization has an adverse effect on
economic growth under exogenous international spillover. This is because it causes
productive non-exporting firms to start exporting, and less productive domestic firms exit due
to fierce competition between domestic and foreign firms. This lowers the ex-ante probabilityof a firm becoming a production firm, which in turn increases R&D costs. Coe and Helpman(1995) observe that imports convey international knowledge spillover among trade partners

3

See Bernard et al. (2006).

in the R&D sector. Put differently, the amount of international spillover is endogenous, notexogenous. Based on Coe and Helpman (1995), they too consider the endogenousinternational spillover case. They assume that the fraction of the value of imported goods ofthe values of goods produced in the trading country. More specifically, knowledge spilloverfrom the trading country depends on the export cutoff relative to the zero profit cutoff. Evenin the case of endogenous international spillover, trade liberalization decreases economicgrowth. As we explain above, trade liberalization increases R&D costs and increased
international spillover decreases R&D costs. The first negative channel unambiguously
dominates the second one, and thus, growth rate decreases through trade liberalization.
Moreover, there is an ambiguous effect on welfare because of the negative channel ofdecrease in the growth rate and higher R&D costs, and while there is a positive effect throughincrease in the weighted average of productivity among production firms, they do not derivea parameter condition for gains from trade.
This result seems to be the general result, but their analyses are limited to only one ofthe parameters consistent with the real world. They focus on the parameter case that the sunkcost for exports is greater than that for the domestic market. The results of the numericalanalysis based on Davis and Harrigan (2011) show that the opposite case also appears
plausible. When the trade cost is at the current level and there are fewer (more) inefficientfirms, the sunk cost for the domestic market is higher (lower) than that for the foreign market.
Accordingly, this paper shows that globalization increases (decreases) economic growthwhen the sunk beachhead cost for the domestic market is higher (lower) than that for theforeign market in a model with firm heterogeneity and endogenous international spillover.
Moreover, we show that further exposure to trade leads to higher welfare under the exact
same condition.4 While it leads to lower expenditure, we see a lower price index throughhigher growth rate and lower expected marginal costs, which in turn dominate the negative
effect of lower expenditure.
This paper shows that endogenous international spillover plays an important role ineconomic growth, because Baldwin and Robert-Nicoud (2008) and Unel (2010) show thatfurther exposure to international trade necessarily decreases economic growth in theexogenous international spillover model and may increase economic growth in all otherendogenous international spillover models.
The rest of the paper is organized as follows. In section 2, we describe and explain
the model. In section 3, we offer our concluding remarks.

4This condition is a sufficient condition for increased welfare through trade liberalization.