trade and technical choice. Neary (2001) formulates a general oligopolistic equilibrium model
where a reduction in trade barriers encourages more strategic investment by incumbent firms in
order to deter entry. In particular, it is shown that, as the number of competitors in an industry
increases after trade liberalization, each firm has a greater incentive to increase its investment
in order to improve its position in the strategic oligopolistic game. Strategic over-investment by
incumbent firms thus raises the ratio of fixed to variable costs. Assuming that fixed investment
costs are skill-intensive relative to variable costs, the model predicts that a move towards free trade
induces a higher skill premium, a higher ratio of skilled to unskilled workers in all sectors (i.e., skill
upgrading) and little changes in trade volumes. Hence, the model predicts that trade liberalization
can affect technical change and skill premia even in the absence of significant increases in actual
trade volumes.19
In the same vein, Ekholm and Midelfart-Knarvik (2001) develop a model where trade liberal-
ization affects the technical choice of firms and can thus lead to skill-biased technical change. They
assume the existence of two technologies: one is characterized by a high (skill-intensive) fixed cost
and a low (unskill-intensive) marginal cost, while the other features a low fixed cost and a high
marginal cost. It is then shown that the market size expansion induced by trade liberalization
increases the relative profitability of firms characterized by a high fixed cost and a low marginal
cost, thus inducing the adoption of the more skill-biased technology.
5.1 Plant-level evidence on the determinants of skill upgrading
5.1.1 The role of imported technology
A recent work by Pavcnik (2000) is one of first attempts to analyze the determinants of skill
upgrading in developing countries. She uses data on 4547 Chilean manufacturing plants spanning
19 There is another important channel through which trade may increase wage inequality in the presence of
oligopolistic markets. For instance, Borjas and Ramey (1995) formulate a model where the traded sector is an
oligopoly and is low-skilled intensive relative to the rest of the economy. Firms and workers share oligopolistic rents
in the traded sector. In this setting, an exogenous increase in imports reduces rents in the oligopolistic sector,
thereby reducing the relative wage of the unskilled. Hence, the trade-induced fall of rates of returns in highly
concentrated and unionized industries, such as the automobile industry, may contribute to a worldwide increase in
wage inequality.
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