Opportunity cost, trade policies and the efficiency of firms

Abstract

This paper analyzes the effects of trade policies on the technological effort of a firm entering a new market in the context of a developing country. We depart from previous literature by bringing into focus the opportunity cost of technological effort. A firm that spends time in acquiring a more efficient technology delays the commercialization of its products, thus incurring an opportunity cost in terms of profits forgone. Protection increases both the opportunity cost and the benefits from technological effort. In the case of linear demand function and constant returns to scale technology, protection is shown to unambiguously reduce the protected firm's technological effort. Export subsidy is also shown to reduce technological effort when the potential level of exports under free trade is high. (C) 2000 Elsevier Science B.V. All rights reserved.