A Factor-Proportions Theory of Endogenous Firm Heterogeneity

This Draft: August 2008In the model where the choice of technology by firms endogenously determines productivity differences, we investigate the link between factor endowment and the productivity both in the firm and industry levels. We find among others that firms in capital-abundant countries tend to adopt new advanced technologies more in their production processes, but opening to international trade will equalize factor prices across countries and as a result productivity differences across countries disappear, if their states of technologies are the same. If the states of technologies are different, on the other hand, the country with a higher state of technology has a lower wage-rental ratio than the other. We argue that the capital-abundant country tends to have a higher state of technology, so if that is the case the wage-rental ratio is lower in the capital-abundant country in free trade.21世紀COEプログラム = 21st-Century COE Program29 p