Trade Liberalization and Integration Strategies of Heterogeneous Firms in Developing Countries

This document proposes a theoretical model with heterogeneous firms to study the optimal integration strategies of firms in developing country and the effect of trade liberalization. We conclude that the higher the productivity of firm is, the more complex the integration strategy is and the lower the fixed cost of overseas production is, the more firms choose to produce intermediate inputs in foreign country. Trade liberalization will depress the horizontal integration and encourage domestic integration and final goods export. Furthermore trade liberalization encourages the vertical integration to take advantage of low variable cost in foreign country.