Trade liberalization and heterogeneous within-firm productivity improvements

This paper develops an intra-industry model of trade with heterogeneous firms to investigate the impact of trade on the evolution of within firm productivity. The main contribution is to incorporate endogenous labor productivity gains. Heterogeneous firms have different incentives to invest in foreign technology which in turns enhances efficiency heterogeneously. Trade liberalization reduces the price of imported capital equipment and increases factor demands. These mechanisms introduce two novel results. First, aggregate productivity increases due to within-firm productivity improvements. Second, tarifs reduction has little impact on the extensive margin of trade in countries already highly open.