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Spillovers from foreign business conditions

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The present paper explores how foreign business conditions affect domestic income, welfare, and industry structure, i.e., the international spillovers from business conditions, in a two-country one-sector heterogeneous-firms trade model. Pro-competitive improvements in foreign business conditions (e.g., a larger market, higher productivity, lower export costs or lower entry costs) increase real income and thus welfare in both countries. The positive spillovers materialize in part through intra-industry reallocations similar to those released by trade liberalization. They include stronger selection into firm survival and a larger share of firms exporting, and, thus, a shift of activity towards more productive firms and a subsequent increase in aggregate productivity. The change in the share of domestic expenditure is shown to be a sufficient statistic for how changes in foreign business conditions affect domestic real income, welfare, and industry structure. Finally, the paper highlights that the sign of the spillover is highly dependent on whether the general equilibrium is restored through standard home market effects or through adjustment in the relative wage.

TidsskriftReview of World Economics
Sider (fra-til)779-814
Antal sider36
StatusUdgivet - aug. 2022

Bibliografisk note

Funding Information:
Financial support from the Carlsberg Foundation is acknowledged. The manuscript has benefited from comments and suggestions by two anonymous reviewers.

Publisher Copyright:
© 2021, The Author(s) under exclusive licence to Kiel Institute for the World Economy.

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