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The role of large firms in the world economy is self-evident from a casual reading of news reports, and is confirmed by recent empirical research. Large firms dominate exports, foreign direct investment (FDI), and research and development (R&D) in both developed and less-developed countries. They also account for much of the growth in exports: suggestions to the contrary, that small firms grow faster than large ones, have been shown with both French and American data to stem in part from a statistical illusion that arises when annual data are used: because new firms are active on average for only six months in their first calendar year of operations, their production and exports in their second year of operations appear to have increased significantly faster than those of large firms. Much of this difference disappears when the data are measured on a monthly rather than an annual basis.
Despite this, much academic work in economics, including the bulk of work on international trade, adopts a view of international markets in which individual firms do not have market power, and differ if at all in scale rather than in kind. This approach has proved very fruitful in addressing a great many problems, but its inability to match many of the major features of the world economy is self-evident. Unfortunately, developing models of international trade that allow for inter-firm differences in more than scale poses major technical problems. The goal of this research project has been to make progress in this direction, by developing new tools and models for understanding the role of large firms in global markets.
A key theme from the research is the so-called “Matthew Effect”: “to those that have, more shall be given.” In the context of firms in international trade, this applies to the advantages enjoyed by larger firms as the global economy expands. Rather than leading to more competitive markets, the thrust of the findings is that the incumbency advantage of larger firms is enhanced by globalization. The Matthew Effect also applies within firms: globalization typically encourages firms to place more emphasis on their “core competence” products, specialising on these while dropping peripheral products The exact ways in which firms do this, and the implications for prices depend on characteristics of the markets in which they operate, and empirical evidence in papers my published papers on this topic (Journal of International Economics 2015 and Review of International Economics 2016) shows that the evidence confirm the theoretical predictions.
More nuanced findings come from the more technical aspects of the project. Highlights of the work completed to date include the distinction between “first-order” and “second-order” selection effects: my work, especially in my papers “Selection Effects with Heterogeneous Firms” (conditionally accepted by the Journal of the European Economic Association) and “Not So Demanding: Preference Structure, Firm Behavior, and Welfare”, (conditionally accepted by the American Economic Review), shows that selection effects of the second kind are not so robust to assumptions about demand. These papers, and also an unpublished paper “Sales and Markup Dispersion: Theory and Empirics”, show that the standard assumption that demand functions have constant elasticity, and that firms are similar in kind if not in size, are not appropriate to understanding features of real-world economies, such as the choice of how to serve foreign markets. Other papers, such as “International Trade in General Oligopolistic Equilibrium,” (Review of International Economics 2016) and the Journal of International Economics 2015 paper already mentioned, highlight insightful ways forward: recognising that firms have the power to manipulate their own market, but are still subject to the vagaries of the global economic trends; and bringing out how the ability of firms to invest in the quality of individual products they produce, as well as in their “brand” as a whole, gives them a competitive edge in world markets.