Policy Implications of Heterogeneous Firms Trade Theory

Abstract

This paper considers the trade and trade-related policy implications of the heterogeneous firms trade literature developed in the context of “new new trade theory”. The recognition in trade theory of firm-level heterogeneity and of the complex global strategies of multinational firms has not changed the basic conclusion that there are significant gains from trade and investment, but it has generated new insights concerning the nature of adjustments in response to policy changes that are of considerable importance to policymakers operating in a stakeholder-driven policymaking process that is highly sensitive to the adjustment process triggered by trade policy changes. The “policy readiness” of the current findings is evaluated and qualified implications are identified for the relative importance of multilateral versus regional and bilateral trade agreements, trade promotion policies, and a number of policy interfaces including trade and innovation and trade and finance. A significant empirical research agenda is indicated by the fact that policymakers currently do not have the quantitative policy tools to evaluate the national interest in trade negotiations, given that this depends on understanding the relationship between the productivity distribution of firms and the changes in market access contemplated in trade policy initiatives, the interaction between productivity and firms entering into two-way trading (importing intermediates and exporting), the interaction between trade and horizontal direct investment, and the impact of changes in market access at home and abroad for the organizational decisions of multinational firms.