Trade and Decentralization

Globalization of economic activities and decentralization of government organization are occurring simultaneously. We consider the implications of government decentralization for intra-national and international trade. Decentralization can create barriers to intra-national trade, but can make international trade relatively more attractive. Imports as substitutes to inbound foreign direct investment suggest a stronger positive effect of decentralization on imports relative to exports. Our empirical results from a standard gravity model find supportive evidence for these conjectures.