Openness and Productivity: a Model of Trade and Firm-Owners

comments and discussions. This paper asks the questions: when countries open up, what are the incentives of firm owners to invest in the productivity of their firms? Why do they wait until the country opens up to do so? Motivated by actions of actual firm owners facing import competition in Portugal, I set up a simple model in which firm owners maximize the utility of profits and leisure. This utility can be easily interpreted as the need to have time to enjoy consumption goods. The model can explain why firm owners wait for the impact of import competition to invest in productivity. The key insight is that with openness the price of leisure increases, causing firm owners to decrease leisure, putting more effort into productivity and therefore getting more income in return. I then adapt the model to consider one further insight: when countries open up, the real price of a consumption basket goes down because consumers enjoy more variety. This again motivates firm owners to work harder in seeking better technologies. In the concluding section I argue that the two models have very different scopes of applicability.