Department of Economics and Business Economics

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.

Original languageEnglish
JournalReview of World Economics
Volume158
Issue3
Pages (from-to)779-814
Number of pages36
ISSN1610-2878
DOIs
Publication statusPublished - Aug 2022

Bibliographical note

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

    Research areas

  • Business conditions, Heterogeneous firms, Industry dynamics, International spillovers, Trade

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