We develop a trade model with correlation in productivity across countries. The model spans the full class of generalized extreme value import demand systems and implies that countries with relatively dissimilar technology gain more from trade. In the context of a multisector trade model, we provide a tractable and flexible estimation procedure for correlation based on compressing highly disaggregate sectoral data into a few latent factors related to technology classes. We estimate significant heterogeneity in correlation across sectors and countries, which leads to quantitative predictions that are significantly different from estimates of models assuming independent productivity across sectors or countries.

Aggregate economies of scale are the engine of growth in models with quasi-endogenous research: larger populations are linked to a higher stock of non-rival ideas (see Jones, 1995; Kortum, 1997; Eaton and Kortum, 2001). Thus, growth rates of per capita real output are proportional to population growth rates, gy = ε · gL, where the parameter ɛ is the efficiency-size elasticity.

This paper quantifies the gains from openness arising from trade and multinational production (MP). We present a model that captures key dimensions of the interaction between these two flows: trade and MP are competing ways to serve a foreign market, MP relies on imports of intermediate goods from the home country, and foreign affiliates of multinationals can export part of their output. The calibrated model implies that the gains from trade can be twice as high as the gains calculated in trade-only models, while the gains from MP are slightly lower than the gains computed in MP-only models.

We present a comprehensive data set on the bilateral activity of multinational firms, with focus on two variables: affiliate revenues and the number of affiliates across country pairs. Our basic data are from UNCTAD and include 59 countries, an average over 1996-2001. We implement an extrapolation procedure that fills in missing values using, alternately, FDI stocks and the bilateral number of M&A transactions. Our dataset allows for the analysis of new patterns of multinational production activities across countries, by taking into account firm rather than balance of payment variables, and both the intensive and extensive margins of multinational activities.

We measure the contribution of firm-embedded productivity to cross-country income differences. By firm-embedded productivity we refer to firm-specific components of productivity, such as blueprints, management practices, and other intangible capital. Using micro-level data for multinational enterprises (MNEs), we compare market shares of the same MNE in different countries and document that they are systematically larger in less developed countries. This indicates that MNEs face less competition and that firm-embedded productivity is scarce in these countries. We implement a measure of firm-embedded productivity based on this observation. Differences in firm-embedded productivity account for one-third of the cross-country variance in output per worker in our sample.