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Frontiers of Economics in China

Front. Econ. China    2018, Vol. 13 Issue (1) : 68-82
Orginal Article |
Global Value Chains, Horizontal Intra-Industry Trade and the Heterogeneous Firm
Sven W. Arndt()
Robert Day School of Economics and Finance, Claremont McKenna College, Claremont, CA 91711, USA
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This paper examines global value chains at the level of the heterogeneous firm. The context is a world of horizontal intra-industry trade, characterized by imperfect competition and product differentiation at the firm level. Standard microeconomic tools are employed to assess the effects of inter-firm dissimilarities in both demand and supply on firms’ responses to changes in trade policy. In this set-up, dissimilarities in firm characteristics play roles similar to factor endowments and technology differences in traditional trade models. When cross-border production sharing (“fragmentation”) is introduced into this framework, those differences in firm characteristics determine the degree to which individual firms will enter into production networks. In this context, horizontal and vertical intra-industry trade elements interact in their effects on firm decisions. Traditional comparative advantage considerations still govern the choice of off-shored activities, while direct competition between imports and exports expands the range of possible outcomes. Finally, it is shown that cross-border production sharing reduces the sensitivity of firms to variations in exchange rates, matching a phenomenon that has been observed in traditional country-level models.

Keywords heterogeneous firms      global value chains      intra-industry trade      intra-product      specialization      exchange-rate elasticities     
Issue Date: 15 March 2018
 Cite this article:   
Sven W. Arndt. Global Value Chains, Horizontal Intra-Industry Trade and the Heterogeneous Firm[J]. Front. Econ. China, 2018, 13(1): 68-82.
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