IER2009 - INTERNATIONAL ECONOMIC REVIEW Vol. 50, No. 3,...

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Unformatted text preview: INTERNATIONAL ECONOMIC REVIEW Vol. 50, No. 3, August 2009 INTERNATIONAL TRADE AND INDUSTRIAL DYNAMICS BY JOSH EDERINGTON AND PHILLIP MCCALMAN 1 University of Kentucky, U.S.A.; University of California, Santa Cruz, U.S.A. In this article, industrial evolution is driven by endogenous technology choices of firms, generating a rich environment that includes the possibility of a dramatic shakeout. The likelihood, magnitude, and timing of this shakeout are character- ized and depend not only on the size of an innovation but also on cost structure. In this setting, trade liberalization reduces the likelihood of a shakeout, result- ing in more stable industrial structures. However, when shakeouts arise in global markets, the distribution of exits can vary widely across countries. Furthermore, conditions exist where a shakeout occurs in a closed economy but not in an open economy. 1. INTRODUCTION The empirical literature on the industry life cycle has documented a variety of patterns in the evolution of market structure. Although some industries exhibit a relatively stable structure where the number of firms is constant or only gradually changing over time, other industries exhibit a pronounced nonmonotonic pattern in which the number of firms falls, often dramatically, after achieving a peak. This change in the number of firms is common enough and dramatic enough to have its own title: a shakeout. A leading example of this phenomenon is the U.S. tire industry, where the number of firms declined from a peak of 275 in 1922 to just 132 firms in 1928. A second intriguing example is the evolution of market structure in the synthetic dye industry. 2 At its inception in the mid 1850s, three countries had significant firm entry into this industry: France, Britain, and Germany. Over Manuscript received March 2007; revised February 2008. 1 This article previously circulated under the title Shaking All Over? International Trade and In- dustrial Dynamics. Numerous individuals provided comments and suggestions that improved this article. We are particularly indebted to Goerg Gotz, Jenny Minier, and three anonymous referees for useful suggestions and comments. We would also like to thank seminar participants at the University of British Columbia, University of California-Berkeley, University of California-Santa Cruz, Univer- sity of California-San Diego, Deakin University, Georgetown University, Latrobe University, London School of Economics, University of Melbourne, Princeton University, Southern Methodist Univer- sity, Sydney University, University of Virginia, the World Bank, CEPR-ERWIT, and NBER-UCR. Please address correspondence to: J. Ederington, Department of Economics, University of Kentucky, Lexington, KY 40506, U.S.A. Phone: 859-257-1588. E-mail: ederington@uky.edu ....
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IER2009 - INTERNATIONAL ECONOMIC REVIEW Vol. 50, No. 3,...

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