Firms' heterogeneity and intraindustry reallocation: Beyond dichotomous partitioning

Abstract This paper studies the trade‐induced reallocation of resources beyond the conventional partition in trade models. It challenges the typical partition of firms into domestic‐only and trading entities. The paper demonstrates that reallocation across heterogeneous firms can occur without such dichotomous partitioning. For reallocation to happen, firms must have different exposure to international markets. The paper uses offshoring models with labor market frictions to illustrate this principle. The offshoring model reveals that labor market frictions induce variations in wage and offshoring intensity. These variations then lead to differential impacts from offshoring cost shifts, resulting in reallocation across heterogeneous firms without partition.