New Horizons in International Business series
Edited by Lorraine Eden and Wendy Dobson
Chapter 10: Responses to Trade Liberalization: Changes in Product Diversification in Foreign- and Domestic-Controlled Plants
10. Responses to trade liberalization: changes in product diversiﬁcation in foreign- and domestic-controlled plants* John R. Baldwin, Richard E. Caves and Wulong Gu INTRODUCTION This paper studies the impact that a small country joining a regional trade agreement, but particularly a small country, might be expected to gain from the exploitation of scale economies. It makes use of the experience of Canada when it entered into the North American Free Trade Agreement (FTA) in the early 1990s. Diversiﬁcation has long remained a murky area in our understanding of industrial organization generally and in particular as it aﬀects the eﬃciency of open economies, which undertake extensive international trade and foreign direct investment but also subject them to government controls.1 Diversiﬁcation is not routinely measured by census takers, leaving us short of both basic facts and research inputs. Economic theory oﬀers certain predictions about where diversiﬁcation will occur, but these rest on diverse assumptions and analytical bases and point to diﬀerent normative verdicts. Furthermore, their implications for the small, open economy have not been pulled together. These are particularly important for Canada, hosting extensive foreign direct investment and with a long tradition of heavy protection giving way under the Canada–United States Free Trade Agreement (FTA) and subsequently the North American Free Trade Agreement (NAFTA). This paper examines diversiﬁcation levels and changes in Canadian manufacturing plants, chieﬂy over the period stretching from the 1980s to the late 1990s, during which NAFTA was...
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