Firm Heterogeneity Under Financial Imperfection: Impacts of Trade and Capital Movement
41 Pages Posted: 20 Oct 2010 Last revised: 16 May 2011
Date Written: October 19, 2010
The paper examines the impacts of trade and capital movement between North and South, which differ in the quality of financial institution, on the productivity distribution and other characteristics of a financially-dependent industry. We find that financial imperfection causes firm heterogeneity and that trade and capital movement are complements in the sense that trade in goods affects the productivity distribution only when accompanied by international capital movement (trade induces capital outflow from South when capital has been internationally mobile). We also find that an international difference in financial development induces reciprocal foreign direct investment.
Keywords: Complementarity, Financial Institution, FDI
JEL Classification: F12, F21, G20, G30
Suggested Citation: Suggested Citation