The Division of Labor within Firms, Optimal Entry, and Firm Productivity

Constructing an intra-industry trade model with division of labor within firms, this paper shows that opening up to trade improves firm productivity. Firms choose the number of markets they export. Optimal entry conditions for export markets rule out loss from opening up to trade. Under fixed export costs, opening up to trade makes some firms exit and concentrates labor to surviving firms through recruiting process and induces the division of labor. An increase in the number of markets induces firms to enter more export markets and improves firm productivity in the long run and has the reverse effect on firm productivity in the short run.