“Globalization, Acquisitions and Endogenous Firm Structure” by Larry Qiu
Authors:
Larry Qiu
The University of Hong KongWen Zhou
The University of Hong Kong
We develop a model of heterogeneous firms with multiple products and endogenous firm structure, and investigate how firms respond to trade liberalizations. Trading capital through mergers and acquisitions, a firm chooses its product scope (i.e., number of products) and plant-level capital scale before competing in the product market. We show that while firms with higher efficiency produce more products, plant and firm level capital are inversely U-shaped with firm efficiency. Firms respond to different types of trade liberalization differently, which leads to different changes capital allocation and productivity. In the importing country that liberalize trade unilaterally, while capital moves from high efficiency firms to low efficiency firms, firm and industry productivity increases. Under bilateral trade liberalization, capital moves from low efficiency firms to high efficiency firms, and productivity may increase or decrease. Our analysis highlights the importance of resource reallocation after trade liberalization and the interaction between product market and acquisition markets.
