The effects of international trade and economic integration on individuals and firms

During the last two decades the costs of importing have decreased due to falling transport costs, improvements in information and communication technologies and liberalized foreign direct investment (FDI) regimes. In many industrialized countries, losses of manufacturing jobs, increasing wage inequality and parallel increases in imports of goods from low-wage countries have raised antitrade sentiments. At the same time, many individuals and firms gain from the liberalization of FDI regimes and trade. For example, while multinational firms are argued to be more inclined than local firms to offshore jobs and downsize inefficient plants, they are also more productive, pay higher wages and generate positive productivity spillovers. Trade liberalization may also have favorable effects on long-term economic growth through innovation. For instance, recent research has indicated that companies and industries that face higher levels of imports from low wage countries increase their productivity and innovate.

The aim of this project is to contribute to the knowledge on the mechanism through which international trade and FDI affects the domestic economy. We focus on the long-term labour market outcomes for individuals, employment structure within firms and the performance of the business sector in terms of productivity and innovation, which have been identified as key areas of the economy through which the rising internationalization affects equality and welfare. The proposal aims to answer to the following four main research questions:

1) How international trade affects workers’ employment and wages and what are its long-term consequences for workers’ careers?
2) How rising import competition and offshoring affects innovation within firms?
3) How the rise of international services trade has affected structure of production, employment and exports in firms? and
4) Has increasing foreign ownership and multinational activity generated positive productivity spillovers in domestic start-up firms? Overall, the four research lines of this proposal aim to provide new and significant knowledge of the effects of increased trade and economic integration on individuals, firms and overall economic performance of industries.

The research is done in collaboration with VATT Institute for Economic Research.

Starting year: 2015
Year of completion: 2019
Person in charge: Nilsson Hakkala, Katariina
Funding: Academy of Finland