Trade Liberalization, Competition and Growth

Abstract

Increasing evidence support the claim that international trade enhances innovation and productivity growth through an increase in competition. This paper develops a two-country endogenous growth model, with rm speci c R&D and a continuum of oligopolistic sectors under Cournot competition to provide a theoretical support to this claim. Since countries are assumed to produce the same set of varieties, trade openness makes markets more competitive, reducing prices and increasing quantities. Under Cournot competition, trade is pro-competitive. Since rms undertake cost reducing innovations, the increase in production induced by a more competitive market push rms to innovate more. Consequently, a reduction on trade barriers enhances growth by reducing domestic rm's market power.&