The unprecedented international economic integration in the past few decades, in the form of global trade and activities of multinational corporations, has spurred heated discussions among policy makers and academics on the costs and benefits of globalization. Despite active research in this area, however, many aspects of globalization and its consequences are still not well understood. This dissertation examines the welfare implications of globalization, focusing on two specific aspects.

The first part of this dissertation studies the determinants and welfare implications of multinational corporations’ decisions to perform R&D outside their home countries, or offshore R&D. In the first chapter, I develop a quantitative model that incorporates two motives for offshore R&D: the talent-acquisition motive, and the market-access motive. I calibrate the model and perform counterfactual experiments to understand the welfare implications of offshore R&D. I find that offshore R&D increases countries’ gains from global integration by a factor of 1.2 on average, with much larger increases for developing than for developed countries. I also find that incorporating offshore R&D has important implications for understanding the welfare impact of traditional forms of global integration, namely trade and offshore production. In the second chapter, I test the key implications of the two offshore R&D motives using firm level data from the United States Patent and Trademark Office. The evidence supports the theory.

The second part of this dissertation, the third chapter, studies the effect of international trade on income and inequality of a country characterized by large domestic trade costs and migration restrictions. I develop a multi-region general equilibrium model featuring domestic trade and migration, both of which are subject to spatial frictions. Quantifying the model using data from China, I find that the trade between China and the rest of the world increases China’s real income, but at the same time exacerbates the inequality in China. More than half of the rise in inequality comes from between-region inequality, while the rest comes from the skill premium. Moreover, there is an interaction between the spatial and the skill dimension of the effect of trade on inequality. Both results underscore the importance of incorporating domestic geographic frictions in understanding the welfare impacts of trade. As an additional contribution, I construct a city-level panel of the Hukou policies in China, and use it to quantify the interaction between Hukou reforms with China’s international trade integration.