Essays on theory of international trade and foreign direct investment with heterogeneous firms

The last decade has witnessed an explosion of empirical and theoretical research on the heterogeneity of firms engaging in international trade and FDI. The literature has developed through interactions between theories and empirics. Once the traditional models are extended to address firm heterogeneity observed in data, they often provide very different answers to old questions. The three chapters in this dissertation aim to make theoretical contributions to this ongoing research program.;Chapter 1: Matching, Quality, and Comparative Advantage: A Unified Theory of Heterogeneous Firm Trade. The theoretical literature on heterogeneous firm trade started as a way to explain a few stylized facts on exporting firms. The literature has developed to address additional facts on importing firms and product prices of traded products, but the development of theories has taken a form of one model per fact. The existing models separately analyzed the heterogeneity of exporting firms and importing firms of intermediates; the commonly used framework, the love of variety model, fails to predict observed transaction patterns of intermediates.;The chapter proposes a new model of trade in intermediates among heterogeneous final producers and intermediate producers. The three key elements of the model, assortative matching of firms by quality, fixed trade costs, and Ricardian comparative advantage, are simple but rich enough to address key stylized facts on exporting firms, importing firms and product prices in the first unified framework. Furthermore, the model demonstrates that reshuffling of firms in production chains arises as a new mechanism of productivity gains from trade liberalization. This new gain explains a previously puzzling finding that liberalization of trade in intermediates improves the productivity of even firms that do not use imported intermediates, provides an alternative explanation for the existence of productive non-globalized firms, and derive a new prediction that resource reallocation can take place from less productive firms to more productive firms regardless of their trading status.;Chapter 2: Foreign Direct Investment in Search Frictional Labor Markets. The impact of foreign direct investment on working conditions in host labor markets has been one of the central topic of empirical studies. In response to public opponents to foreign direct investment, the empirical literature has shown that foreign firms offer better jobs in terms of wage and job separation rates. In contrast to the progress of empirical research, most theoretical models of FDI cannot address differences in working conditions across firms since they rely on static perfectly competitive labor markets. The chapter investigates foreign direct investment in a dynamic model of search frictional labor markets with on-the-job search by Burdett and Mortensen (1998), in which firms compete for workers by positing wage and workers move to high wage jobs. With the assumption that FDI requires fixed costs, the model predicts that foreign firms are more productive, pay higher wage, and offer jobs with lower separation rates than domestic firms. An interesting prediction for future empirical research is that even horizontal FDI between identical countries increase wage inequality among workers with similar skills. The FDI inflow raises the overall wage distributions, but the rise in wages at "good jobs" is larger than at "bad jobs".;Chapter 3: Commercial Policy and Foreign Ownership (with Jota Ishiakawa at Hitotsubashi University and Leixun Zhao at Kobe University). The third chapter analyzes trade and industrial policies when firms are heterogeneous in ownership and modes of access to the foreign market in the two senses. First, multinationals serve a foreign market by exporting one product as well as locally producing other products through FDI. Second, foreign firms often have full control of local firms with only a partial share of ownership. With these features, an otherwise conventional Cournot model derives surprising predictions on the effects of trade protections. The difference in the ownership and control shares enhances a production shifting of multinationals from export to FDI in response to a rise in trade barriers so that tariffs and production subsidies may harm locally-owned firms. The model also analyzes foreign ownership regulation and shows that it benefits locally-owned firms.