Innovation and production in the global economy

Costas Arkolakis, Natalia Ramondo, Andrés Rodríguez Clare, Stephen Yeaple

Research output: Contribution to journalReview articlepeer-review

85 Scopus citations


We develop a quantifiable general equilibrium model of trade and multinational production (MP) in which countries can specialize in innovation or production. Home market effects or comparative advantage leads some countries to specialize in innovation and relegate manufacturing operations to other countries via outward MP. Counterfactual analysis reveals that the reduction in the cost of MP or the integration of China into the world economy may hurt countries that are driven to specialize in production, although these losses tend to be very small. Contrary to popular fears, production workers gain even in countries that further specialize in innovation. (JEL D58, F12, F14, F23, L60, O31).

Original languageEnglish (US)
Pages (from-to)2128-2173
Number of pages46
JournalAmerican Economic Review
Issue number8
StatePublished - Aug 2018

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics


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