Peter K. Schott

Bio: Peter K. Schott is an academic researcher from Yale University. The author has contributed to research in topics: Free trade & Trade barrier. The author has an hindex of 54, co-authored 144 publications receiving 18330 citations. Previous affiliations of Peter K. Schott include Cowles Foundation & University of Oxford.

Firms in International Trade

Abstract: Despite the fact that importing and exporting are extremely rare firm activities, economists generally devote little attention to the role of firms when discussing international trade. This paper summarizes key differences between trading and non-trading firms, demonstrates how these differences present a challenge to standard trade models and shows how recent "heterogeneous-firm" models of international trade address these challenges. We then make use of transaction-level U.S. trade data to introduce a number of new stylized facts about firms and trade. These facts reveal that the extensive margins of trade -- that is, the number of products firms trade as well as the number of countries with which they trade -- are central to understanding the well-known role of distance in dampening aggregate trade flows.

Firms in international trade

Abstract: In discussing the origins and implications of international trade, economists usually emphasize comparative advantage, increasing returns to scale, and consumer love of variety, but pay relatively little attention to the firms that actually drive trade flows. Yet engaging in international trade is an exceedingly rare activity: of the 5.5 million firms operating in the United States in 2000, just 4 percent were exporters. Among these exporting firms, the top 10 percent accounted for 96 percent of total U.S. exports. Since the mid-1990s, a large number of empirical studies have provided a wealth of information about the important role thatfirms play in mediating countries’ imports and exports. This research, based on micro datasets that track countries’ production and trade at the firm level, demonstrates that trading firms differ substantially from firms that solely serve the domestic market. Across a wide range of countries and industries, exporters have been shown to be larger, more productive, more skill- and capital-intensive, and to pay higher wages than nonexportingfirms. Furthermore, these

Across-Product Versus Within-Product Specialization in International Trade

Abstract: This paper exploits product-level U. S. import data to test trade theory. Although the United States increasingly sources the same products from both high- and low-wage countries, unit values within products vary systematically with exporter relative factor endowments and exporter production techniques. These facts reject factor-proportions specialization across products but are consistent with such specialization within products. The data are inconsistent with new trade theory models predicting an inverse relationship between price and producer productivity. The existence of within-product specialization is an important consideration for understanding the impact of globalization on firms and workers, the evolution of total factor productivity, and the likelihood of long-run income convergence.

Multiple-Product Firms and Product Switching

Abstract: This paper examines the frequency, pervasiveness, and determinants of prod uct switching by US manufacturing firms. We find that one-half of firms alter their mix of five-digit SIC products every five years, that product switching is correlated with both firm- and firm -product attributes, and that product adding and dropping induce large changes in firm scope. The behavior we observe is consistent with a natural generalization of existing theories of industry dynam ics that incorporates endogenous product selection within firms. Our findings suggest that product switching contributes to a reallocation of resources within firms toward their most efficient use. (JEL LI 1, L21, L25, L60) The extent to which resources are allocated to their best use is a core issue of economics. Until now, research into industry dynamics has addressed this issue by focusing almost exclusively on the contribution of firm entry and exit to resource reallocation, that is, whether newly created firms or plants are more productive than the dying firms and plants they replace.1 This paper examines a new, "extensive" margin of firm adjustment, the reassignment of resources that takes place within surviving firms as they add and drop (i.e., "switch") products. Our analysis of product switching makes use of a unique longitudinal dataset that tracks US firms' product-level manufacturing output across quinquennial US Manufacturing Censuses

Multi-Product Firms and Trade Liberalization

Abstract: This paper develops a general equilibrium model of multi-product firms and analyzes their behavior during trade liberalization. Firm productivity in a given product is modeled as a combination of firm-level "ability" and firm-product-level "expertise", both of which are stochastic and unknown prior to the firm's payment of a sunk cost of entry. Higher firm-level ability raises a firm's productivity across all products, which induces a positive correlation between a firm's intensive (output per product) and extensive (number of products) margins. Trade liberalization fosters productivity growth within and across firms and in aggregate by inducing firms to shed marginally productive products and forcing the lowest-productivity firms to exit. Though exporters produce a smaller range of products after liberalization, they increase the share of products sold abroad as well as exports per product. All of these adjustments are shown to be relatively more pronounced in countries' comparative advantage industries.

Gravity with Gravitas: A Solution to the Border Puzzle

Abstract: Gravity equations have been widely used to infer trade flow effects of various institutional arrangements. We show that estimated gravity equations do not have a theoretical foundation. This implies both that estimation suffers from omitted variables bias and that comparative statics analysis is unfounded. We develop a method that (i) consistently and efficiently estimates a theoretical gravity equation and (ii) correctly calculates the comparative statics of trade frictions. We apply the method to solve the famous McCallum border puzzle. Applying our method, we find that national borders reduce trade between industrialized countries by moderate amounts of 20-50 percent.

Export Versus FDI with Heterogeneous Firms

Abstract: Multinational sales have grown at high rates over the last two decades, outpacing the remarkable expansion of trade in manufactures. Consequently, the trade literature has sought to incorporate the mode of foreign market access into the “new” trade theory. This literature recognizes that Ž rms can serve foreign buyers through a variety of channels: they can export their products to foreign customers, serve them through foreign subsidiaries, or license foreign Ž rms to produce their products. Our work focuses on the Ž rm’s choice between exports and “horizontal” foreign direct investment (FDI). Horizontal FDI refers to an investment in a foreign production facility that is designed to serve customers in the foreign market. Firms invest abroad when the gains from avoiding trade costs outweigh the costs of maintaining capacity in multiple markets. This is known as the proximity-concentration tradeoff. We introduce heterogeneous Ž rms into a simple multicountry, multisector model, in which Ž rms face a proximity-concentration trade-off. Every Ž rm decides whether to serve a foreign market, and whether to do so through exports or local subsidiary sales. These modes of market access have different relative costs: exporting involves lower Ž xed costs while FDI involves lower variable costs. Our model highlights the important role of within-sector Ž rm productivity differences in explaining the structure of international trade and investment. First, only the most productive Ž rms engage in foreign activities. This result mirrors other Ž ndings on Ž rm heterogeneity and trade; in particular, the results reported in Melitz (2003). Second, of those Ž rms that serve foreign markets, only the most productive engage in FDI. Third, FDI sales relative to exports are larger in sectors with more Ž rm heterogeneity. Using U.S. exports and afŽ liate sales data that cover 52 manufacturing sectors and 38 countries, we show that cross-sectoral differences in Ž rm heterogeneity predict the composition of trade and investment in the manner suggested by our model. We construct several measures of Ž rm heterogeneity, using different data sources, and show that our results are robust across all these measures. In addition, we conŽ rm the predictions of the proximityconcentration trade-off. That is, Ž rms tend to substitute FDI sales for exports when transport * Helpman: Department of Economics, Harvard University, Cambridge, MA 02138, Tel Aviv University, and CIAR (e-mail: ehelpman@harvard.edu); Melitz: Department of Economics, Harvard University, Cambridge, MA 02138, National Bureau of Economic Research, and Centre for Economic Policy Research (e-mail: mmelitz@ harvard.edu); Yeaple: Department of Economics, University of Pennsylvania, 3718 Locust Walk, Philadelphia, PA 19104, and National Bureau of Economic Research (e-mail: snyeapl2@ssc.upenn.edu). The statistical analysis of Ž rmlevel data on U.S. Multinational Corporations reported in this study was conducted at the International Investment Division, U.S. Bureau of Economic Analysis, under an arrangement that maintained legal conŽ dentiality requirements. Views expressed are those of the authors and do not necessarily re ect those of the Bureau of Economic Analysis. Elhanan Helpman thanks the NSF for Ž nancial support. We also thank Daron Acemoglu, Roberto Rigobon, Yona Rubinstein, and Dani Tsiddon for comments on an earlier draft, and Man-Keung Tang for excellent research assistance. 1 See Wilfred J. Ethier (1986), Ignatius Horstmann and James R. Markusen (1987), and Ethier and Markusen (1996) for models that incorporate the licensing alternative. We therefore exclude “vertical” motives for FDI that involve fragmentation of production across countries. See Helpman (1984, 1985), Markusen (2002, Ch. 9), and Gordon H. Hanson et al. (2002) for treatments of this form of FDI. 3 See, for example, Horstmann and Markusen (1992), S. Lael Brainard (1993), and Markusen and Anthony J. Venables (2000). 4 See also Andrew B. Bernard et al. (2003) for an alternative theoretical model and Yeaple (2003a) for a model based on worker-skill heterogeneity. James R. Tybout (2003) surveys the recent micro-level evidence on trade that has motivated these theoretical models. 5 This result is loosely connected to the documented empirical pattern that foreign-owned afŽ liates are more productive than domestically owned producers. See Mark E. Doms and J. Bradford Jensen (1998) for the United States and Sourafel Girma et al. (2002) for the United Kingdom.

Growth is Good for the Poor

Abstract: When average incomes rise, the average incomes of the poorest fifth of society rise proportionately. This holds across regions, periods, income levels, and growth rates. But relatively little is known about the broad forces that account for the variations across countries and across time in the share of income accruing to the poorest fifth. When average incomes rise, the average incomes of the poorest fifth of society rise proportionately. This is a consequence of the strong empirical regularity that the share of income accruing to the bottom quintile does not vary systematically with average income. Dollar and Kraay document this empirical regularity in a sample of 92 countries spanning the past four decades and show that it holds across regions, periods, income levels, and growth rates. Dollar and Kraay next ask whether the factors that explain cross-country differences in the growth rates of average incomes have differential effects on the poorest fifth of society. They find that several determinants of growth - such as good rule of law, openness to international trade, and developed financial markets - have little systematic effect on the share of income that accrues to the bottom quintile. Consequently, these factors benefit the poorest fifth of society as much as everyone else. There is some weak evidence that stabilization from high inflation and reductions in the overall size of government not only increase growth but also increase the income share of the poorest fifth in society. Finally, Dollar and Kraay examine several factors commonly thought to disproportionately benefit the poorest in society, but find little evidence of their effects. The absence of robust findings emphasizes that relatively little is known about the broad forces that account for the cross-country and intertemporal variation in the share of income accruing to the poorest fifth of society. This paper - a product of Macroeconomics and Growth, Development Research Group - is part of a larger effort in the group to study growth and poverty reduction. The authors may be contacted at ddollar@worldbank.org or akraay@worldbank.org.

The Impact of Uncertainty Shocks

Abstract: Uncertainty appears to jump up after major shocks like the Cuban Missile crisis, the assassination of JFK, the OPEC I oil-price shock and the 9/11 terrorist attack This paper offers a structural framework to analyze the impact of these uncertainty shocks I build a model with a time varying second moment, which is numerically solved and estimated using firm level data The parameterized model is then used to simulate a macro uncertainty shock, which produces a rapid drop and rebound in aggregate output and employment This occurs because higher uncertainty causes firms to temporarily pause their investment and hiring Productivity growth also falls because this pause in activity freezes reallocation across units In the medium term the increased volatility from the shock induces an overshoot in output, employment and productivity Thus, second moment shocks generate short sharp recessions and recoveries This simulated impact of an uncertainty shock is compared to VAR estimations on actual data, showing a good match in both magnitude and timing The paper also jointly estimates labor and capital convex and non-convex adjustment costs Ignoring capital adjustment costs is shown to lead to substantial bias while ignoring labor adjustment costs does not