NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Innovation and Production in the Global Economy

Costas Arkolakis, Natalia Ramondo, Andrés Rodríguez-Clare, Stephen Yeaple

NBER Working Paper No. 18972
Issued in April 2013
NBER Program(s):   ITI

The decline in the costs of multinational production (MP) has led some countries to specialize in innovation and others to specialize in production. To study the aggregate and distributional implications of this phenomenon, we develop a quantifiable general equilibrium model of trade and MP. Specialization is endogenously determined as a result of comparative advantage and home market effects (HME) that arise from the interaction between increasing returns to innovation and geographical frictions. The model yields simple structural expressions for bilateral trade and MP that we use to calibrate it across a set of OECD countries. Comparative statics exercises reveal that the reduction in the cost of MP or the integration of China into the world economy may hurt countries that are driven to specialize in production due to HMEs, although these losses tend to be very small. Contrary to popular fears, we find that production workers gain even in countries that further specialize in innovation.

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This paper was revised on May 16, 2017

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Document Object Identifier (DOI): 10.3386/w18972

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