Asymmetric effects of trade and FDI: The role of country size and bridge multinational production

Abstract

Gains from trade in goods stem from three channels: (i) trade, (ii) domestic multinational production (DMP), and (iii) bridge multinational production (BMP). We develop a quantitative theory to measure the effects of trade barriers and country size on the gains from openness through each of these channels. We show that gains are sensitive to country size and larger in Europe than in South America (i.e larger in countries with low barriers). Country size is a crucial determinant of the contribution of each of these channels to the total gains from openness: smaller countries gain more. DMP is more important in large countries, whereas the BMP channel is more important in small countries.