The Interaction Between Technology Adoption and Trade When Firms are Heterogeneous

This paper develops a monopolistic competition model with heterogeneous firms to study the interaction between technology adoption and trade in a world of two countries facing different technology adoption costs. It shows that a reduction in the technology adoption cost in one country increases productivity, induces more firms to adopt advanced technology, and improves welfare in this country, while decreasing productivity, inducing more firms to switch back to old technology, and reducing welfare in the other country. Furthermore, although a reduction in transport costs always makes the country with the lower adoption cost better off, it can hurt the other country.