Firm heterogeneity and the localization of economic activities.

This paper examines how market-access strategies, via exports and FDI, respond to changes in the level of integration. Empirical evidence shows that both firm exports and multinational activity are affected by trade liberalization episodes. We account for the strong positive correlation between exports and FDI by developing a general-equilibrium model featuring firm heterogeneity, trade and FDI with final and intermediate products. Different geographical spaces are considered to quantify the effect of a preferential trade agreement ( PTA) on supply-mode decisions, for both partner and excluded countries. The model sheds new light on the mechanisms through which geography reshapes the concentration of economic activities both inside and outside the PTA area. [ABSTRACT FROM AUTHOR]