Decision on the number of export markets firms enter and the optimal division of labor within firms

By constructing an intra-industry trade model with the division of labor within firms, this study shows that trade improves firm productivity through promoting the division of labor. The division of labor is limited not by the size of each market but by the number of export markets that firms enter. Reallocation of labor across firms based on free-entry condition, fixed export costs, and constant markup rate plays a key role behind this result. Firms enter the export markets in the ascending order of entry costs. As trade costs decrease, firms enter more export markets if the number of markets does not reach the upper bound. Hence, the division of labor is essentially limited by trade costs. This implication brings new insight to Adam Smith's theorem.