Trade and Growth with Heterogeneous Firms and Asymmetric Countries

By Takumi Naito (Vanderbilt University and Waseda University)

Trade liberalization encourages more productive firms to start exporting, while it forces more unproductive firms to exit from their domestic markets. The increase in the average productivity because of tougher selection contributes to higher welfare of countries. This idea, captured by the Melitz model of heterogeneous firms, has now become one of the standard principles of international economics.[1] However, the implications of liberalization-induced selection for countries’ growth was not explored until Richard Baldwin and Frédéric Robert-Nicoud (henceforth BRN) set up a two-country R&D-based endogenous growth model that embodies this underlying feature.[2] In the BRN model, trade liberalization has mixed effects on long-run growth: on the one hand, it allows knowledge to flow across borders more freely through trade in goods, which is good for growth; on the other hand, it makes it more difficult for a potential entrant to survive, which is bad for growth. The total growth effect of liberalization depends on the specification of R&D technologies.

Since BRN, many researchers have developed models of trade and growth with heterogeneous firms based on a common assumption: symmetric countries.[3] This is clearly unrealistic in the context of developing and developed countries: they are totally different in terms of endowments, preferences, and technologies. Not only that, the assumption also prevents us from studying the effects of policy shocks that are necessarily asymmetric across countries such as unilateral trade liberalization, regional trade agreements, and so on. To enlarge the scope of heterogeneous firm models of trade and growth for policy analysis, we have to extend them to allow for asymmetric countries.

In spite of the demand, there has been no successful attempt to deal with asymmetric countries in heterogeneous firms and endogenous growth settings. The problem is to evaluate an entrant’s future profits possibly growing at different rates across markets and over time, which makes it almost impossible for us to determine the entrant’s entry decision. How can we resolve the technical difficulty?

In a recent research project, which so far consists of two papers, I have provided two possible solutions to resolve this difficulty.  In the first paper, the solution I provide involves giving up the assumption that firms have an infinite horizon.[4] In my framework, each firm’s product life ends in each period, and they have to pay the initial and market entry costs every time they reenter their markets. By embedding the static Melitz framework in a two-country AK model (i.e., an endogenous growth model with constant returns to capital), I show that unilateral trade liberalization increases the numbers and revenue shares of exported varieties and the growth rates of all countries for all periods, and welfare of all countries, compared with the old balanced growth path (BGP), where all variables grow at constant rates. Intuitively, a country’s import liberalization directly encourages exports and domestic selection in the partner country, while it indirectly promotes exports and domestic selection in the liberalizing country through the decreased relative rental rate clearing its trade deficit.[5] More domestic selection implies the higher return to, and hence the growth rate of, capital. The greatest advantage of the model is the ability to describe the transitional dynamics caused by policy changes, distinguishing between the short- and long-run effects.

In the second paper of this project, the solution I provide involves giving up transitional dynamics in order to focus on a BGP in an asymmetric BRN model where firms do have infinite horizons.[6] Then we can still determine the relative number of varieties from the balanced growth condition, and also the relative wage from the balanced trade condition. It turns out that unilateral trade liberalization has similar selection effects to the first paper described above, and the symmetric BRN model: a country’s import liberalization encourages exports and domestic selection in both the partner and liberalizing countries. As a result, even unilateral trade liberalization can speed up global growth if it sufficiently facilitates international knowledge spillovers.

With the two solutions in hand, we are no longer restricted by the assumption of symmetric countries in endogenous growth models with heterogeneous firms. Our models are so flexible that they can be extended to study the effects of trade policies, domestic policies, or combinations thereof. For example, for governments of developing countries who depend heavily on import tariffs as a revenue source, it has been a serious concern how to design a domestic tax structure which recovers the revenue lost from trade liberalization. It will be interesting to see how such tariff and tax reform affects growth and welfare of developing and developed countries in a Melitz world. It should also be noted that the above two-country models can be extended to more than two countries, although the analysis will be much harder. This allows us to examine the effects of a regional trade agreement on member and nonmember countries. It is hoped that the papers will trigger applications of asymmetric heterogeneous firm models of trade and growth to more relevant policy issues.


Baldwin, R. E., and F. Robert-Nicoud (2008) “Trade and growth with heterogeneous firms,” Journal of International Economics 74(1), 21-34

Demidova, S., and A. Rodríguez-Clare (2013) “The simple analytics of the Melitz model in a small economy,” Journal of International Economics 90(2), 266-272

Felbermayr, G., B. Jung, and M. Larch (2013) “Optimal tariffs, retaliation, and the welfare loss from tariff wars in the Melitz model,” Journal of International Economics 89(1), 13-25

Gustafsson, P., and P. Segerstrom (2010) “Trade liberalization and productivity growth,” Review of International Economics 18(2), 207-228

Melitz, M. J. (2003) “The impact of trade on intra-industry reallocations and aggregate industry productivity,” Econometrica 71(6), 1695-725

Naito, T. (2017a) “An asymmetric Melitz model of trade and growth,” Economics Letters 158, 80-83

Naito, T. (2017b) “Growth and welfare effects of unilateral trade liberalization with heterogeneous firms and asymmetric countries,” Journal of International Economics 109, 167-173

Sampson, T. (2016) “Dynamic selection: an idea flows theory of entry, trade, and growth,” Quarterly Journal of Economics 131(1), 315-380


[1] Melitz (2003).

[2] Baldwin and Robert-Nicoud (2008)

[3] See, for example, Gustafsson and Segerstrom (2010) and Sampson (2016).

[4] Naito (2017a)

[5] The reallocation mechanism induced by unilateral trade liberalization described here is the same as that in the static asymmetric Melitz models of Felbermayr et al. (2013) and Demidova and Rodríguez-Clare (2013), except that they consider labor as the only factor.

[6] Naito (2017b)

LSE PhD Studentships

In 2018 LSE will be offering around 100 major studentships to new PhD students in the form of LSE PhD Studentships and LSE ESRC DTP Studentships.


LSE PhD Studentships are tenable for four years and cover full fees and an annual stipend of £18,000. They are available for UK, EU and international students undertaking research in any LSE discipline, with annual renewal subject to satisfactory academic performance.

These awards will be made solely on the basis of outstanding academic merit and research potential. This relates both to your past academic record and to an assessment of your likely aptitude to complete a PhD in your chosen topic in the time allocated.

The studentships include a requirement that scholars contribute to their department as part of their research training, in the form of teaching or other work, usually from year two onwards.

Deadline: December 13th, 2017.

Click here for further details and to apply

Call for Papers: 28th Conference of the International Trade and Finance Association, Beijing, China,

May 23-26 (Wednesday to Saturday), 2018. We are delighted that Beijing University of Business and Economics is hosting our 2018 conference.


IT&FA is a multi-disciplinary association, and welcomes scholars and professionals from economics and finance, marketing and management, law, communications and other disciplines with an interest in globalization and the global economy. The conference will consist of regular competitive sessions, as well as plenary sessions dealing with high-profile issues.

We invite proposals on all aspects of international trade and finance, including such emerging issues as cyber security and economic warfare, digital free trade and e-commerce, intellectual property protections, and trade in various services. As in the past, IT&FA seeks papers on trade policy, exchange rates, investments and capital flows, banking, migration, tourism, communications, transportation, governance and law, and management and marketing. Industry-specific studies are welcome (such as agriculture, retail, textiles, and entertainment), as are proposals dealing with multilateral, regional, and national issues impacting international trade and finance. Theoretical, conceptual and empirical papers are also invited.

  • Program: Offers discussions of economic topics across many disciplines via speakers and panels.
  • Special Events: The Presidential Address, award presentations, paper/panel presentations, gala dinner, and networking opportunities.
  • Proceedings: The International Trade and Finance Association will publish an electronic “Papers and Proceedings” edition highlighting selected papers from the meeting.
  • Paper Awards: We offer US$500 for the best paper submitted to the conference and US$250 for the best student paper, along with certificates confirming each.


IT&FA’s registration fee is US$300 to all participants/US$125 for students who submit initial registration materials and abstracts by January 31, 2018. The late registration fee is $350 after January 31, 2018. This fee will cover registration, associated expenses, and one year’s membership in IT&FA.

Cancellations: Before April 15, 100% of the registration fee is refundable. After April 15, 50% of the fee is refundable.

The conference will open with a reception on Wednesday, May 23, hold sessions on Thursday and Friday, including a banquet on Friday evening, and conclude with final sessions or a group event on Saturday, May 26. Those planning to depart on Sunday, May 27, will have time to investigate the unique circumstances that connect China to the evolving global economy. These include important history, world-class cultural beautiful parks, and shopping.

IT&FA seeks both proposals for individual papers and for complete sessions. Complete sessions should have three to four papers. In the case of multiple authors for a paper, at least one author must register for the conference. No participant will be permitted to present more than two papers.


  • November 1, 2017, to January 31, 2018 – Registration Materials and Abstracts submitted for Peer Review
  • February 15, 2018 – Notification of Acceptance by this date
  • March 31, 2018 – Payment of Registration Fee Due. Visa documentation requests due along with payment, if not requested earlier.
  • April 15, 2018 – Deadline for Hotel Registrations. Cancellation for 100% returned fees, 50% return fees hereafter.
  • May 1, 2018 – Conference schedule posted online
  • May 23 to 26, 2018 – Conference convenes at Beijing University of International Business and Economics

For additional registration information and updates, please see the association website: If you have any questions, please contact

Prof. Sarah K. Bryant, the Executive Vice President, at

Tenure Track Faculty-Economics, Villanova University

Position Summary 

The Department of Economics at the Villanova School of Business seeks to fill a tenure track position in Economics beginning Fall 2018 at the rank of Assistant Professor, with the rank of Associate Professor considered for candidates with outstanding qualifications and experience.
We will consider candidates in the areas of Behavioral Economics and Environmental Economics. We are especially interested in hiring an individual with strong applied econometrics expertise.

Villanova is a Catholic university sponsored by the Augustinian order. Diversity and inclusion have been and will continue to be an integral component of Villanova University’s mission. The University is an Equal Opportunity/Affirmative Action employer and seeks candidates who understand, respect and can contribute to the University’s mission and values.

Duties and Responsibilities 

The Villanova School of Business is committed to both scholarly research and teaching excellence. In addition to maintaining an active research agenda leading to high quality publications, the appointment involves teaching at the undergraduate and graduate levels with a teaching load of two courses per semester.

Minimum Qualifications 

Candidates are expected to have completed their Ph.D. degree before the appointment starts. Candidates must demonstrate a strong commitment to high quality research and possess excellent teaching skills.

Preferred Qualifications 

Evidence of strong research potential and teaching excellence are highly valued.

Special Message to Applicants

Applicants must apply online at by December 1, 2017.
All initial applications are to include:
Application letter
Curriculum vitae
Statement of teaching philosophy
Statement of research interests
Copies of recent research papers
3 letters of reference must be submitted by applicants.
For finalists, an official graduate transcript will be required. To mail hard copy of transcripts, please send to Search Committee, Department of Economics, Villanova University, 800 Lancaster Avenue, Bartley Hall, Villanova, PA 19085.
Review of applications begins upon receipt and continues until the position is filled.

  • Open until filled
  • Fall 2018

Research Officer, Oxford Department of International Development

Productivity and Development: The Ready-made Garment Productivity Project

Grade 7: £31,604 – £38,833 p.a

The Oxford Department of International Development is seeking a fixed-term research officer with strong quantitative skills to manage data work on a large project in the ready-made garment sector. The Ready-made Garment Productivity Project has collected detailed administrative records from nearly 100 garment factories. The main objectives of the project are: understanding productivity dispersion across and within multi-product firms; understanding how management practices relate to persistent productivity differences; assessing the relationship between productivity and worker well-being.

Reporting to the Principal Investigator, Professor Christopher Woodruff, the research officer will take charge of organising the data, identifying and solving issues with comparability across factories, and identifying potential areas for analysis. Experience in statistical analysis and data handling is essential. Experience managing large datasets is preferred. The post is full-time, and tenable for 1 year in the first instance, to start as soon as possible.

The postholder will manage all aspects of the data from the project; produce and facilitate analysis which illuminates key patterns in the data, developing tools as required; design and write reports, including for non-academic audiences and the website; and conduct analyses for academic publications using the data. Applicants must have a Master’s degree in economics, statistics or related field; demonstrated quantitative skills including knowledge of Stata, R, or other statistical software; be flexible, self-motivated, and a team player; demonstrate experience of, and interest in development economics or management; and possess excellent written and verbal communication skills in English.

The closing date for applications is 12.00 noon on 4 December 2017.

Please note that the University of Oxford’s retirement policy has changed. With effect from 1 October 2017, all employees at Grade 8 and above have a retirement age of the 30 September before the 69th birthday. All employees at Grades 1-7 do not have a set retirement age.

Further details are available here: