Theories of heterogeneous firms and trade

This paper reviews the recent theoretical literature on heterogeneous firms and trade, whichemphasizes firm selection into international markets and reallocations of resources acrossfirms. We discuss the empirical challenges that motivated this research and its relationship totraditional trade theories. We examine the implications of firm heterogeneity for comparativeadvantage, market size, aggregate trade, the welfare gains from trade, and the relationshipbetween trade and income distribution. While a number of studies examine the endogenousresponse of firm productivity to trade liberalization, modelling internal firm organization andthe origins of firm heterogeneity remain interesting areas of ongoing research.