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Export Prices Across Firms and Destinations
TL;DR: In this paper, stylized facts about firms' export prices using detailed customs data on the universe of Chinese trade flows are established, showing that exporters that charge higher prices earn greater revenues in each destination, have bigger worldwide sales, and enter more markets.
Abstract: This paper establishes six stylized facts about firms' export prices using detailed customs data on the universe of Chinese trade flows. First, across firms selling a given product, exporters that charge higher prices earn greater revenues in each destination, have bigger worldwide sales, and enter more markets. Second, firms that export more, that enter more markets and that charge higher export prices import more expensive inputs. Third, across destinations within a firm-product, firms set higher prices in richer, larger, bilaterally more distant and overall less remote countries. Fourth, across destinations within a firm-product, firms earn bigger revenues in markets where they set higher prices. Fifth, across firms within a product, exporters with more destinations offer a wider range of export prices. Finally, firms that export more, that enter more markets and that offer a wider range of export prices pay a wider range of input prices and source inputs from more origin countries. We propose that trade models should incorporate two features to rationalize these patterns in the data: more successful exporters use higher-quality inputs to produce higher-quality goods (stylized facts 1 and 2), and firms vary the quality of their products across destinations by using inputs of different quality levels (stylized facts 3, 4, 5 and 6).
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TL;DR: In this paper, the authors studied the impact of a regional free trade agreement, MERCOSUR, on technology upgrading by Argentinean firms and showed that the increase in revenues produced by trade integration can induce exporters to upgrade technology.
Abstract: This paper studies the impact of a regional free trade agreement, MERCOSUR, on technology upgrading by Argentinean firms. To guide empirical work, I introduce technology choice in Melitz’s (2003) model of trade with heterogeneous firms. The joint treatment of the technology adoption and exporting choices shows that the increase in revenues produced by trade integration can induce exporters to upgrade technology. An empirical test of the model reveals that firms in industries facing higher reductions in Brazil’s import tariffs increase their investment in technology faster and exporters upgrade technology faster than other firms in the same industry.
1,365 citations
TL;DR: In this article, the authors derive an estimating equation to estimate markups using standard production plant-level data based on the insight of Hall (1986) and the control function approach of Olley and Pakes (1996), which allows for various underlying price setting models, dynamic inputs, and does not require measuring the user cost of capital or assuming constant returns to scale.
Abstract: Estimating markups has a long tradition in industrial organization and international trade. Economists and policy makers are interested in measuring the effect of various competition and trade policies on market power, typically measured by markups. The empirical methods that were developed in empirical industrial organization often rely on the availability of very detailed market-level data with information on prices, quantities sold, characteristics of products and more recently supplemented with consumer-level attributes. Often, both researchers and government agencies cannot rely on such detailed data, but still need an assessment of whether changes in the operating environment of firms had an impact on markups and therefore on consumer surplus. In this paper, we derive an estimating equation to estimate markups using standard production plant-level data based on the insight of Hall (1986) and the control function approach of Olley and Pakes (1996). Our methodology allows for various underlying price setting models, dynamic inputs, and does not require measuring the user cost of capital or assuming constant returns to scale. We rely on our method to explore the relationship between markups and export behavior using plant-level data. We find that i) markups are estimated significantly higher when controlling for unobserved productivity, ii) exporters charge on average higher markups and iii) firms markups increase (decrease) upon export entry (exit). We see these findings as a first step in opening up the productivity-export black box, and provide a potential explanation for the big measured productivity premia for firms entering export markets.
809 citations
TL;DR: In this article, a model of endogenous input and output quality choices by heterogeneous firms was proposed to explain the observed price-plant correlation. But the empirical patterns are consistent with a parsimonious extension of the Melitz (2003, “The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity,” Econometrica, 71, 1695-1725) framework to include endogenous choice of input andoutput quality.
Abstract: Drawing on uncommonly rich and representative data from the Colombian manufacturing census, this paper documents new empirical relationships between input prices, output prices, and plant size and proposes a model of endogenous input and output quality choices by heterogeneous firms to explain the observed patterns. The key empirical facts are that, on average within narrowly defined sectors, (1) larger plants charge more for their outputs and (2) larger plants pay more for their material inputs. The latter fact generalizes the well-known positive correlation between plant size and wages. Similar correlations hold between prices and export status. We show that the empirical patterns are consistent with a parsimonious extension of the Melitz (2003, “The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity,” Econometrica, 71 , 1695–1725) framework to include endogenous choice of input and output quality. Using a measure of the scope for quality differentiation from Sutton (1998, Technology and Market Structure: Theory and History . Cambridge: MIT Press), we show that differences across sectors in the relationships between prices and plant size are consistent with our model. Available evidence suggests that differences in observable measures of market power do not provide a complete explanation for the empirical patterns. We interpret the results as supportive of the hypothesis that quality differences of both inputs and outputs play an important role in generating the price–plant size correlations.
699 citations
TL;DR: In this paper, the authors exploited China's National Trunk Highway System as a large-scale natural experiment to contribute to our understanding of the question: are the resulting trade cost reductions a force for the diffusion of industrial and total economic activity to peripheral regions, or do they reinforce the concentration of production in space?
Abstract: Large-scale transport infrastructure investments connect both large metropolitan centres of production as well as small peripheral regions. Are the resulting trade cost reductions a force for the diffusion of industrial and total economic activity to peripheral regions, or do they reinforce the concentration of production in space? This article exploits China's National Trunk Highway System as a large-scale natural experiment to contribute to our understanding of this question. The network was designed to connect provincial capitals and cities with an urban population above 500,000. As a side effect, a large number of small peripheral counties were connected to large metropolitan agglomerations. To address non-random route placements on the way between targeted city nodes, I propose an instrumental variable strategy based on the construction of least cost path spanning tree networks. The estimation results suggest that network connections have led to a reduction in GDP growth among non-targeted peripheral counties. This effect appears to be driven by a significant reduction in industrial output growth. Additional results present evidence in support of a trade-based channel in the light of falling trade costs between peripheral and metropolitan regions.
641 citations
TL;DR: A review of empirical evidence on firm heterogeneity in international trade can be found in this article, where a first wave of empirical findings from micro data on plants and firms proposed challenges for existing models of international trade and inspired the development of new theories emphasizing firm heterogeneity.
Abstract: This paper reviews the empirical evidence on firm heterogeneity in international trade. A first wave of empirical findings from micro data on plants and firms proposed challenges for existing models of international trade and inspired the development of new theories emphasizing firm heterogeneity. Subsequent empirical research has examined additional predictions of these theories and explored other dimensions of the data not originally captured by them. These other dimensions include multi-product firms, offshoring, intra-firm trade and firm export market dynamics.
511 citations
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TL;DR: In this article, the authors randomly generate placebo laws in state-level data on female wages from the Current Population Survey and use OLS to compute the DD estimate of its "effect" as well as the standard error of this estimate.
Abstract: Most papers that employ Differences-in-Differences estimation (DD) use many years of data and focus on serially correlated outcomes but ignore that the resulting standard errors are inconsistent. To illustrate the severity of this issue, we randomly generate placebo laws in state-level data on female wages from the Current Population Survey. For each law, we use OLS to compute the DD estimate of its “effect” as well as the standard error of this estimate. These conventional DD standard errors severely understate the standard deviation of the estimators: we find an “effect” significant at the 5 percent level for up to 45 percent of the placebo interventions. We use Monte Carlo simulations to investigate how well existing methods help solve this problem. Econometric corrections that place a specific parametric form on the time-series process do not perform well. Bootstrap (taking into account the autocorrelation of the data) works well when the number of states is large enough. Two corrections based on asymptotic approximation of the variance-covariance matrix work well for moderate numbers of states and one correction that collapses the time series information into a “pre”- and “post”-period and explicitly takes into account the effective sample size works well even for small numbers of states.
9,397 citations
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TL;DR: In this paper, a dynamic industry model with heterogeneous firms is proposed to explain why international trade induces reallocations of resources among firms in an industry and contributes to a welfare gain.
Abstract: This Paper builds a dynamic industry model with heterogeneous firms that explains why international trade induces reallocations of resources among firms in an industry. The Paper shows how the exposure to trade will induce only the more productive firms to enter the export market (while some less productive firms continue to produce only for the domestic market) and will simultaneously force the least productive firms to exit. It then shows how further increases in the industry's exposure to trade lead to additional inter-firm reallocations towards more productive firms. These phenomena have been empirically documented but cannot be explained by current general equilibrium trade models, because they rely on a representative firm framework. The Paper also shows how the aggregate industry productivity growth generated by the reallocations contributes to a welfare gain, thus highlighting a benefit from trade that has not been examined theoretically before. The Paper adapts Hopenhayn's (1992a) dynamic industry model to monopolistic competition in a general equilibrium setting. In so doing, the Paper provides an extension of Krugman's (1980) trade model that incorporates firm level productivity differences. Firms with different productivity levels coexist in an industry because each firm faces initial uncertainty concerning its productivity before making an irreversible investment to enter the industry. Entry into the export market is also costly, but the firm's decision to export occurs after it gains knowledge of its productivity.
5,186 citations
TL;DR: In this article, Helpman et al. introduce a simple multicountry, multisector model, in which firms face a proximity-concentration trade-off between exports and FDI.
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 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 rms to produce their products. Our work focuses on the 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 rms into a simple multicountry, multisector model, in which rms face a proximity-concentration trade-off. Every 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 xed costs while FDI involves lower variable costs. Our model highlights the important role of within-sector rm productivity differences in explaining the structure of international trade and investment. First, only the most productive rms engage in foreign activities. This result mirrors other ndings on rm heterogeneity and trade; in particular, the results reported in Melitz (2003). Second, of those rms that serve foreign markets, only the most productive engage in FDI. Third, FDI sales relative to exports are larger in sectors with more rm heterogeneity. Using U.S. exports and af liate sales data that cover 52 manufacturing sectors and 38 countries, we show that cross-sectoral differences in rm heterogeneity predict the composition of trade and investment in the manner suggested by our model. We construct several measures of rm heterogeneity, using different data sources, and show that our results are robust across all these measures. In addition, we con rm the predictions of the proximityconcentration trade-off. That is, 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 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 con 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 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 af 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.
3,823 citations
TL;DR: The authors illustrates the danger of spurious regression from this kind of misspecification, using as an example a wage regression estimated on data for individual workers that includes in the specification aggregate regressors for characteristics of geographical states.
Abstract: Many economic researchers have attempted to measure the effect of aggregate market or public policy variables on micro units by merging aggregate data with micro observations by industry, occupation, or geographical location, then using multiple regression or similar statistical models to measure the effect of the aggregate variable on the micro units. The methods are usually based upon the assumption of independent disturbances, which is typically not appropriate for data from populations with grouped structure. Incorrectly using ordinary least squares can lead to standard errors that are seriously biased downward. This note illustrates the danger of spurious regression from this kind of misspecification, using as an example a wage regression estimated on data for individual workers that includes in the specification aggregate regressors for characteristics of geographical states. Copyright 1990 by MIT Press.
2,859 citations
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TL;DR: In this article, the authors propose a network/search view of international trade in differentiated products and present evidence that supports the view that proximity and common language/colonial ties are more important for differentiated products than for products traded on organized exchanges in matching international buyers and sellers.
Abstract: I propose a network/search view of international trade in differentiated products. I present evidence that supports the view that proximity and common language/colonial ties are more important for differentiated products than for products traded on organized exchanges in matching international buyers and sellers, and that search barriers to trade are higher for differentiated than for homogeneous products. I also discuss alternative explanations for the findings.
2,292 citations