Essays on international trade and financial frictions

This dissertation consists of five chapters: The first one reviews the literature, the next three are the core essays, and the final chapter provides concluding remarks.;The first essay identifies a new source of gains from trade from asset heterogeneity among firms. Under financial frictions, a firm's capital rental is constrained by its own assets. It is shown that, with or without productivity heterogeneity, trade openness or liberalization will always force the least wealthy firms to close; induce the rationalization effect which shifts capital and labor from small, less wealthy firms to large, wealthier ones; and as a result, improve social welfare and total factor productivity (TFP) due to increasing returns to scale. The simulation result shows that the higher the financial frictions or the greater the asset inequality among firms, the larger the gains from trade from this new source. This essay also shows that some existing results in models with heterogeneous firms need to be modified under financial frictions. For example, the cutoff productivity to export may increase with trade liberalization and the total number of export firms may decrease with financial liberalization.;While international joint venture is a dominated strategy in the property rights theory of the firm, the second essay shows that it can be optimal in the presence of contractual and financial frictions if the local suppliers are unable to compensate ex ante the multinational firms with enough cash. This essay uses the data of Chinese foreign affiliates to test and support the key theoretical result that joint ventures are in general more R&D intensive than wholly foreign-owned enterprises, and this result is reinforced in financially more vulnerable industries. Furthermore, when wealth constraints loosen, the share of joint venture in foreign affiliates is also likely to decrease and decline more in financially more vulnerable industries. Finally, the relationships between technology spillovers and ownership structures are explored and the implications are in line with the literature and confirmed by our empirical results.;The final essay develops a general equilibrium trade model to explain the puzzle that the drop in trade was much more than the drop in GDP during the recent financial crisis. It is shown that financial shocks in one country will reallocate resources from the credit-constrained, export-oriented sectors to the unconstrained sectors in all other countries along a global supply chain, resulting in the spillover effect from one country's capital markets to other countries' real sectors. Consequently, the decline in the ratio of trade flows to GDP will amplify in the presence of incomplete capital markets and vertical production linkages. This essay also shows that free international capital flows generate more synchronized drops in trade flows, and the impacts of financial shocks on trade flows become greater when the informed capital from financial intermediaries is scarce.