Trade liberalization, selection, and technology adoption with vertical linkages

This paper analyses the role played by vertical linkages on the effects of trade liberalization on technology upgrading, average productivity and welfare in a model of trade with heterogeneous firms. We find that the strength of vertical linkages shapes the effects that trade liberalization produces on firms’ survival and technology upgrading decisions, having an impact on the average productivity of the economy and, ultimately, on welfare. Our calibration results show that vertical linkages, technology upgrading, and their interaction magnify the effects of trade liberalization on average productivity and welfare.