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Journal Article•DOI•

The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity

Marc J. Melitz1•
Harvard University1
01 Nov 2003-Econometrica (ECONOMETRICA)-Vol. 71, Iss: 6, pp 1695-1725
TL;DR: This paper developed a dynamic industry model with heterogeneous firms to analyze the intra-industry effects of international trade and showed 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).
Abstract: This paper develops a dynamic industry model with heterogeneous firms to analyze the intra-industry effects of international trade. The model 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. 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.

Summary (6 min read)

Jump to: [1 Introduction] – [2 Model Background] – [Demand] – [Production] – [Aggregation] – [4 Firm Entry and Exit] – [Zero Cutoff ProÞt Condition] – [Free Entry and the Value of Firms] – [5 Equilibrium in a Closed Economy] – [Existence and Uniqueness of the Equilibrium] – [Analysis of the Equilibrium] – [6 Overview and Assumptions of the Open Economy Model] – [7 Equilibrium in the Open Economy] – [Firm Entry, Exit, and Export Status] – [Determination of the Equilibrium] – [8 The Impact of Trade] – [The Reallocation of Market Shares and ProÞts Across Firms] – [Why Does Trade Force the Least Productive Firms to Exit?] – [9 The Impact of Trade Liberalization] – [Increase in the Number of Trading Partners] – [Decrease in Trade Costs] and [10 Conclusion]

1 Introduction

  • Recent empirical research using longitudinal plant or Þrm-level data in several countries has overwhelmingly substantiated the existence of large and persistent productivity differences among establishments in the same narrowly deÞned industries.
  • Evidence reported in Roberts and Tybout (1996) and Davis and Haltiwanger (1999) conÞrms that these patterns are not speciÞc to the U.S. and that substantial within sector reallocations between heterogeneous Þrms are also prevalent in developing countries.
  • On the other hand, if the reallocations are related to Þrm characteristics, then the nature of the link between the two signiÞcantly affects several important aspects of industry performance.
  • The paper then shows how further increases in the industry s exposure to trade (driven either by trade liberalization or the addition of new trading partners) lead to additional inter-Þrm reallocations towards more productive Þrms.
  • Neither of these studies Þnds evidence supporting this hypothesis.

2 Model Background

  • Incorporating heterogeneity in a dynamic industry setting, where forward looking Þrms make entry and export decisions, necessarily increases the technical complexity of this model vis-a-vis its representative Þrm counterparts.
  • The main forces explaining the impact of trade on an industry are nevertheless quite intuitive.
  • The model draws heavily from Hopenhayn s (1992a, 1992b) work on Þrm and industry productivity dynamics to explain the endogenous selection of heterogeneous Þrms in an industry.
  • Forward looking, Þrm entry decision, it greatly simpliÞes 5As was previously mentioned, one of the robust empirical patterns emerging from recent industry studies is that new entrants are much more likely to have lower productivity and exit than do older incumbents.
  • This equilibrium therefore does not respond to changes in the entry cost while being overly sensitive to the magnitude of the losses incurred by Þrms who exit the industry.

Demand

  • The measure of the set Ω will represent the mass (or alternatively, the number) of available goods.
  • (1) These aggregates can then be used to derive the optimal consumption decisions over individual varieties using q(ω) = Q µ p(ω).

Production

  • Production requires only one factor, labor, which is inelastically supplied at its aggregate level L (which also indexes the size of the economy).
  • Firm technology is represented by a cost function that exhibits constant marginal cost with a Þxed overhead cost.

Aggregation

  • Using the same weighted average function deÞned in (9), let ϕ = ϕ(ϕ∗) and ϕx = ϕ(ϕ∗x) denote the average productivity levels of, respectively, all Þrms and exporting Þrms only.
  • The average productivity across all Þrms, ϕ, is based only on domestic market share differences between Þrms (as reßected by differences in the Þrms productivity levels).
  • If some Þrms do not export, then this average will not reßect the additional export shares of the more productive Þrms.

4 Firm Entry and Exit

  • There is a large pool of prospective entrants into the industry.
  • Upon entry with a low productivity draw, a Þrm may decide to immediately exit and not produce.
  • He then shows how these Þrm level productivity dynamics give the equilibrium distribution of productivity levels µ(ϕ) a different shape than the ex-ante distribution g(ϕ), and determine the ex-ante survival probabilities for a Þrm, conditional on successful entry.
  • On the other hand, the range of productivity levels, and hence the average productivity level, are endogenously determined.
  • Modeling an additional time discount factor would not qualitatively change any of the results.

Zero Cutoff ProÞt Condition

  • This will not be the case in the current situation.
  • The model thus does not differentiate between cohorts of incumbent Þrms.
  • This cohort is then critically differentiated from that formed by new entrants, whose distribution of productivity levels is given by g(ϕ).

Free Entry and the Value of Firms

  • Since all incumbent Þrms other than the cutoff Þrm earn positive proÞts, the average proÞt level π̄ must be positive.
  • If this value were negative, no Þrm would want to enter.
  • In any equilibrium where entry is unrestricted, this value could further not be positive since the mass of prospective entrants is unbounded.

5 Equilibrium in a Closed Economy

  • A stationary equilibrium is deÞned by constant aggregate variables over time and the free entry of Þrms into the industry.
  • Me of new entrants in every period, such that the mass of successful entrants, pinMe, exactly replaces the mass δM of incumbents who are hit with the bad shock and exit: pinMe = δM.
  • The labor used by these new entrants for investment purposes must, of course, be reßected in the accounting for aggregate labor L, and affects the aggregate labor available for production: L = Lp+Le where Lp and Le represent the aggregate labor used for production and investment (by new entrants).
  • In equilibrium, the aggregate return Π equals the aggregate investment cost Le in every period so there is no net investment income (this would not be the case with a positive time discount factor).

Existence and Uniqueness of the Equilibrium

  • The free entry (FE) and zero cutoff proÞt (ZCP) conditions represent two different relationships between the average proÞt level π̄ and the cutoff productivity level ϕ∗ (see (12)).
  • I Þrst summarize their important properties for the determination of the equilibrium values of ϕ∗ and π̄: In (ϕ,π) space the FE curve is increasing and is cut by the ZCP curve only once from above .
  • As the cutoff level ϕ∗ goes to zero, the revenue of the cutoff Þrm also goes to zero.
  • If g(ϕ) belongs to most of the common families of distributions (including the lognormal, exponential, Gamma, or Weibull distributions or truncations on (0,∞) of the normal, logistic, extreme value, or Laplace distributions), then k(ϕ) will monotonically decrease to zero on (0,∞).
  • These regularity conditions ensure that an increase in the cutoff level ϕ∗ redistributes the mass of incumbent Þrms towards the cutoff level.

Analysis of the Equilibrium

  • As was just shown, the equilibrium productivity cutoff level, ϕ∗, and average Þrm proÞt, π̄, do not depend on the country size L. Hence, the equilibrium distribution of productivity levels µ(ϕ) and average productivity level ϕ will also be independent of country size.
  • The large country will just have more Þrms in an amount proportional to its country size.
  • Once ϕ and π̄ are determined, the aggregate outcome predicted by this model is identical to one generated by an economy with representative Þrms who share the same productivity level ϕ and proÞt level π̄.
  • In the following sections, I argue that the exposure of a country to trade creates precisely the type of shock that induces reallocations between Þrms and generates increases in aggregate productivity.
  • These results can not be explained by representative Þrm models where the aggregate productivity level is exogenously given as the productivity level common to all Þrms.

6 Overview and Assumptions of the Open Economy Model

  • I now examine the impact of trade in a world (or trade bloc) that is composed of countries whose economies are of the type that was previously described.
  • The transition to trade will thus not affect 19Consumers in every country have access to the same bundle of goods at the same aggregate price index.
  • The current model is modiÞed by allowing the elasticity of substitution to endogenously increase with product variety.
  • Bernard and Jensen (1999a), Clerides, Lach and Tybout (1998), Roberts and Tybout (1997a), and Roberts, Sullivan and Tybout (1995) all introduce a Þxed export cost into the theoretical sections of their work in order to explain the self-selection of Þrms into the export market.
  • Countries who differ only in country size can exhibit different wage rates in the equilibrium with trade.

7 Equilibrium in the Open Economy

  • The symmetry assumption ensures that all countries share the same wage, which is still normalized to one, and also share the same aggregate variables.
  • Firms who export will set higher prices in the foreign markets that reßect the increased marginal cost τ of serving these markets: px(ϕ) = τ ρϕ = τpd(ϕ).
  • The analysis of these equilibria is left for future work.
  • (16) If some Þrms do not export, then there no longer exists an integrated world market for all goods.

Firm Entry, Exit, and Export Status

  • All the exogenous factors affecting Þrm entry, exit, and productivity levels remain unchanged by trade.
  • Prior to entry, Þrms face the same ex-ante distribution of productivity levels g(ϕ).
  • In a stationary equilibrium, any incumbent Þrm with productivity ϕ earns variable proÞts rx(ϕ)σ in every period from its export sales to any given country.
  • If ϕ∗x > ϕ∗, then some Þrms (with productivity levels between ϕ∗ and ϕ∗x) produce exclusively for their domestic market.

Determination of the Equilibrium

  • As in the closed economy case, a stationary equilibrium is uniquely determined by the triplet (ϕ∗, P,R) satisfying the free entry and zero cutoff proÞt conditions.
  • The equilibrium ϕ∗, in turn, determines the export productivity cutoff ϕ∗x as well as the average productivity levels ϕ, ϕx, ϕt, and the ex-ante successful entry and export probabilities pin and px.
  • As was the case in the closed economy equilibrium, the free entry condition and the aggregate stability condition30 (pinMe = δM) ensure that the aggregate payment to the investment workers.
  • Le equals the aggregate proÞt level Π. As shown in (18), the aggregate price index is determined by the aggregate number of goods available in each country (Mt) and the average productivity level across all Þrms selling these goods ( ϕt).

8 The Impact of Trade

  • The result that the modeling of Þxed export costs explains the partitioning of Þrms by export status and productivity level is not exactly earth-shattering.
  • On the other hand, such a model would be ill-suited to address several important questions concerning the impact of trade in the presence of export market entry costs and Þrm heterogeneity:.
  • It is nevertheless possible, when the export costs are high, that these foreign Þrms replace a larger number of domestic Þrms (if the latter are sufficiently less productive).

The Reallocation of Market Shares and ProÞts Across Firms

  • I now examine how the impact of trade on individual Þrms changes with the Þrm s productivity level.
  • Additionally, in this equilibrium with trade, rd(ϕ)R represents the Þrm s share of its domestic market (since rd(ϕ) is the Þrm s domestic revenue and R also represents aggregate consumer expenditure in the country).
  • Thus, a Þrm who exports increases its share of industry revenues while a Þrm who does not export loses market share.
  • (The market share of the least productive Þrms in the autarky equilibrium with productivity between ϕ∗a and ϕ∗ drops down to zero as these Þrms exit.).
  • 25 Summarizing these results on the Þrm level impact of trade by stating that the beneÞts of trade are not equally spread across Þrms would be quite an understatement!.

Why Does Trade Force the Least Productive Firms to Exit?

  • The most obvious cause explaining the exit of the least productive domestic Þrms would be the new competition from the entry of the more productive Þrms into the domestic market.
  • With C.E.S. product differentiation, the new import competition affects domestic Þrms with different productivity levels in similar ways, and translates only into a reduction in aggregate sales for all domestic Þrms.
  • On the other hand, if the model were amended to allow for the opening of new export markets without any import competition, then distributional changes very similar to those described for the symmetric trade case would occur (and the least productive Þrms would be forced to exit the industry).
  • In equilibrium, an increase in the proÞts of more productive Þrms relative to less productive Þrms leads to more entry and a higher cutoff productivity level.
  • It is therefore the pull of the export markets, rather than the push of import competition that forces the least productive Þrms to exit.

9 The Impact of Trade Liberalization

  • The preceding analysis compared the equilibrium outcomes of an economy undergoing a massive change in trade regime from autarky to trade.
  • The current model is well-suited to address several different mechanisms that would produce an increase in trade exposure and plausibly correspond to observed decreases in trade costs over time or some speciÞc policies to liberalize trade.
  • These three scenarios involve comparative statics of the open economy equilibrium with respect to n, τ , and fx.
  • The main impact of the transition from autarky to trade was an increase in aggregate productivity and welfare generated by a reallocation of market shares towards more productive Þrms (where the least productive Þrms are forced to exit).
  • The increased exposure to trade will also unequivocally deliver welfare gains.

Increase in the Number of Trading Partners

  • Throughout this comparative static exercise, I use the notation of the open economy equilibrium to describe the old equilibrium with n countries.
  • I then add primes (0) to all variables and functions when they pertain to the new equilibrium with n0 > n countries.
  • Thus, both market shares and proÞts are reallocated towards the more efficient Þrms.

Decrease in Trade Costs

  • A decrease in the variable trade cost τ will induce almost identical effects to those just described for the increase in trading partners.
  • 0 < τ (again I use primes to reference all variables and functions in the new equilibrium) will shift up the ZCP curve and induce an increase in the cutoff productivity level ϕ∗0 > ϕ∗.
  • As before, the increased exposure to trade will force the least productive Þrms to exit, but it will now also generate the entry of new Þrms into the export market (who did not export with the higher τ).
  • As before, the exit of the least productive Þrms and the market share increase of the most productive Þrms both contribute to an aggregate productivity gain and an increase in welfare.
  • 40 38There is a transitional issue associated with the exporting status of Þrms with productivity levels between ϕ∗x and ϕ∗0x .

10 Conclusion

  • This paper has described and analyzed a new transmission channel for the impact of trade on industry structure and performance.
  • Since this channel works through intra-industry reallocations across Þrms, it can only be studied within an industry model that incorporates Þrm level heterogeneity.
  • The paper shows how the existence of export market entry costs drastically affects how the impact of trade is distributed across different types of Þrms.
  • In fact, only a portion of the Þrms the more efficient ones reap beneÞts from trade in the form of gains in market share and proÞt.
  • It is therefore important to have a model that can predict the impact of trade policy on inter-Þrm reallocations in order to design accompanying policies that would address issues related to the transition towards a new regime.

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NBER WORKING PAPER SERIES
THE IMPACT OF TRADE ON INTRA-INDUSTRY REALLOCATIONS
AND AGGREGATE INDUSTRY PRODUCTIVITY
Marc J. Melitz
Working Paper 8881
http://www.nber.org/papers/w8881
NATIONAL BUREAU OF ECONOMIC RESEARCH
1050 Massachusetts Avenue
Cambridge, MA 02138
April 2002
The author thanks, without implicating, Alan Deardor, Jim Levinsohn, and Elhanan Helpman for helpful
comments and discussions. Funding from the Alfred P. Sloan Foundation is gratefully acknowledged. The
views expressed herein are those of the author and not necessarily those of the National Bureau of Economic
Research.
© 2002 by Marc J. Melitz. All rights reserved. Short sections of text, not to exceed two paragraphs, may
be quoted without explicit permission provided that full credit, including © notice, is given to the source.
The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity
Marc J. Melitz
NBER Working Paper No. 8881
April 2002
JEL No. F1
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 can not 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.
Mark J. Melitz
Department of Economics
Littauer Center
Harvard University
Cambridge, MA 02138
and NBER
mmelitz@harvard.edu
1 In troduction
Recent empirical research using longitudinal plant or Þrm-level data in several countries has ov er-
whelmingly substan tiated the existence of large and persistent productivit y differences among es-
tablishments in the same narrowly deÞned industries. Foster, Haltiwanger and Krizan (1998)
summarize this research by concluding that “... within sector differences dwarf betw een sector
differences in behavior.” In related work, Haltiwanger (1997, Table 1) reports that 4-digit industry
effectsexplainlessthan10percentoftheoverallvariationinthegrowthratesofoutput,em-
ployment, capital stocks, and productivity across establishments in the U.S. from 1977 to 1987.
Complementing this evidence on the extent of within sector heterogeneit y, other studies hav e sho w n
that the bulk of resource reallocations across Þrms remains internal to the speciÞc sector. Davis
and Haltiwanger (1999) summarize this evidence for the U.S. and report that less than 1 in 10 job
reallocations reßect employment shifts acro ss sectors. Levinsohn (1999) reports similar numbers for
most industries in Chile following wide-reaching trade liberalization. Evidence reported in Roberts
and T ybout (1996) and Davis and Haltiwanger (1999) conÞrms that these patterns are not speciÞc
to the U.S. and that substantial within sector reallocations between heterogeneous Þrms are also
prevalent in developing countries.
If these large intra-industry reallocations w ere unrelated to the heterogeneous characteristics of
Þrms, then their separate existence would not necessarily make them important determining factors
of industry performance. On the other hand, if the reallocations are related to Þrm characteristics,
then the nature of the link between the tw o signiÞcantly affects several important aspects of industry
performance. Although the analysis of this link between Þrm characteristics and industry evolution
is an ongoing research program, enough evidence has b een collected to demonstrate its existence and
relevance for industry performance. The main Þrm characteristic found to be empirically linked to
in tra-industry reallocations is Þrm productivit y.
1
The strongest evidence of this link pertains to Þrm
entry and exit decisions. Productivity differences between entering and exiting Þrms signiÞcan tly
cont ribute to aggregate industry productivit y c hanges over time. Additionally, a large number of
studies have documented a strong correlation bet ween Þrm exit and lo w productivit y (Þrm age
is also correlated with exit: younger Þrms have disproportionately high failure rates). Finally,
some studies have also found evidence that reallocations unrelated to entry and exit contribute to
1
Firm age and capital vintage are other importan t explanatory characteristics that hav e been highlighted in some
studies, although their impact may be limited to their effect on productivity.
1
industry productivity growth b y redistributing market shares among incumbent Þrms.
2
A similar
reallocation process has also been studied at a higher level of aggregation: Basu and Fernald
(1997) Þnd that U.S. aggregate productivit y changes across the business cycle are partly driven
b y expenditure reallocations across sectors with differen t average productivity lev els. The inherent
inabilit y of representative Þrm industry models to explain the contribution of reallocations to
industry performance has prompted the development of a theoretical literature of industry dynamics
that emphasizes the role of Þrm level heterogeneit y. This literature, along with the previously
mentioned empirical evidence, is reviewed in Foster, Haltiwanger and Krizan (1998) and Tybout
(2002).
This paper adapts one of these recen t industry models with heterogeneous Þrms in order to an-
alyze the role of international trade as a catalyst for inter-Þrm reallocations within an industry. It
then describes how these reallocations affect both industry performance and welfare. The business
press often assumes the existenc e of this catalyst role of trade when describing how exposure to
trade has both enhanced the growth opportunities of some Þrms while simu ltaneously cont ribut-
ing to the down fall or “downsizing” of other Þrms in the same industry. Similarly, protection from
trade is reported to shelter inefficient Þrms. Rigorous empirical work has recently corroborated this
anecdotal evidence. Bernard and Jensen (1999a) (for the U.S.), Aw, Ch ung and Roberts (2000) (for
Taiw an), and Clerides, Lach and T ybout (1998) (for Colom bia, Mexico, and Morocco) all Þnd evi-
dence that the causation of the correlation between Þrm productivity and export status runs from
theformertothelatter: moreproductiveÞrms self-select into the export market. Aw, Chung and
Roberts (2000) also Þnd evidence suggesting that exposure to trade forces the least productive Þrms
to exit the industry (Þrms with higher productivity levels relativ e to the incumbent average exit
after the exposure to trade). Both of these selection effects (into the export market and out of the
industry) obviously reallocate market shares from less productive Þrms(whoexit)tomoreproduc-
tive ones (who export) and therefore contribute to industry productivity growth.
3
P av cnik (2002)
directly looks at the contribution of market share reallocations to sectoral productivity growth
follow ing trade liberalization in Chile. She Þnds that these reallocations signiÞcan tly contribute to
productivity growth in the tradable sectors. In a related study, Bernard and Jensen (1999b) Þnd
that within-sector mark et share reallocations towards more productive exporting plants accounts
2
The importance of this phenomenon varies across studies and is cyclically sensitive (see Foster, Haltiwanger and
Krizan (1998))
3
Forces other than trade also affect the reallocation of resources within an industry. Olley and Pakes (1996) Þnd
that deregulation in the U.S. telecommunications industry increased productivity predominantly through this channel
rather than through intra-Þrm productivity gains.
2
for 20% of U.S. manufacturing productivity gro wth.
By relying on a representative Þrm framew ork (at least at the level of the industry), general
equilibrium trade models have largely ignored these intra-industry reallocations and focused instead
on other consequences of trade, such as inter-industry reallocations or phenomena affecting all Þrms
in similar ways.
4
This paper attempts to Þll this gap by providing a general equilibrium model
with heterogeneous Þrms that explains how trade induces these selection effects and in tra-industry
reallocations. This model shows how exposure to trade will induce only the more productive Þrms
to enter the export markets (while some less productive Þrms continue to produce only for the
domestic market) and will sim u ltaneously force the least productive Þrms to exit. The paper then
shows how further increases in the industry’s exposure to trade (drive n either by trade liberalization
or the addition of new trading partners) lead to additional inter-Þrm reallocations towards more
productive Þrms. The model th u s explains how trade can generate industry productivity growth
without necessarily affecting in tra-Þrm efficiency. It also provides a theoretical foundation for
the recent empirical Þndings described above and rigorously shows how trade can contribute to
the Darwinian evolution of industries — forcing the least efficient Þrms to con tract or exit while
promoting the growth and success of the more efficient ones.
Another recen t paper by Bernard, Eaton, Jenson and Kortum (2000) also introduces Þrm-level
heterogeneity into a model of trade b y adapting a Ricardian model to Þrm-speciÞccomparative
advantage. Both papers predict the same basic kinds of trade-induced reallocations, although the
ch annels and motiv ations behind these reallocations vary. In addition, Bernard et al. (2000) sho w
how their model can be calibrated to provide a good ÞttoacombinationofmicroandmacroUS
data patterns. Ho wev er, subsequent work b y Brooks (2001) has sho wn that this feature is not
robust across countries. The current paper relies on the previously docume nted empirical micro
patterns and focuses on the theoretical explanations and motivations behind these patterns.
4
This last category includes models that assume a direct link between trade and Þrm lev el efficiency. In these
models, exposure to trade typically increases the efficiency level of all Þrms through a variety of channels: learning
effects, increased scale of production, increased innovation, higher quality or diversity of intermediate inputs, reduction
of agency problems between owners and managers. Clerides, Lach and Tybout (1998) and Bernard and Jensen (1999a)
speciÞcally test whether new exporting Þrmsbecomemoreefficient. Neither of these studies Þnds evidence supporting
this hypothesis. Tybout and Westbrook (1995) test and reject the hypothesis that increased productivity in Mexico’s
growing export industries was driven by increases in the scale of plant production.
3
Citations
More filters
Journal Article•DOI•
Export Versus FDI with Heterogeneous Firms

[...]

Elhanan Helpman1, Elhanan Helpman2, Elhanan Helpman3, Marc J. Melitz4, Marc J. Melitz5, Marc J. Melitz3, Stephen R. Yeaple •
Tel Aviv University1, Canadian Institute for Advanced Research2, Harvard University3, Center for Economic and Policy Research4, National Bureau of Economic Research5
01 Feb 2004-The American Economic Review
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 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.

3,823 citations

Journal Article•DOI•
The China Syndrome: Local Labor Market Effects of Import Competition in the United States

[...]

David H. Autor1, David Dorn2, Gordon H. Hanson•
Massachusetts Institute of Technology1, CEMFI2
01 Oct 2013-The American Economic Review
TL;DR: This paper analyzed the effect of Chinese import competition between 1990 and 2007 on US local labor markets, exploiting cross-market variation in import exposure stemming from initial diffe cerence to US labor markets.
Abstract: We analyze the effect of rising Chinese import competition between 1990 and 2007 on US local labor markets, exploiting cross-market variation in import exposure stemming from initial diffe...

2,818 citations

Journal Article•DOI•
What Determines Productivity

[...]

Chad Syverson1•
University of Chicago1
01 Jun 2011-Journal of Economic Literature
TL;DR: The authors surveys and evaluates recent empirical work addressing the question of why businesses differ in their measured productivity levels, and lays out what I see are the major questions that research in the area should address going forward.
Abstract: Economists have shown that large and persistent differences in productivity levels across businesses are ubiquitous. This finding has shaped research agendas in a number of fields, including (but not limited to) macroeconomics, industrial organization, labor, and trade. This paper surveys and evaluates recent empirical work addressing the question of why businesses differ in their measured productivity levels. The causes are manifold, and differ depending on the particular setting. They include elements sourced in production practices -- and therefore over which producers have some direct control, at least in theory -- as well as from producers' external operating environments. After evaluating the current state of knowledge, I lay out what I see are the major questions that research in the area should address going forward. (JEL D24, G31, L11, M10, O30, O47)

2,380 citations

Journal Article•DOI•
Market Size, Trade, and Productivity

[...]

Marc J. Melitz1, Gianmarco I.P. Ottaviano2•
Princeton University1, University of Bologna2
01 Jan 2008-The Review of Economic Studies
TL;DR: In this paper, the authors develop a monopolistically competitive model of trade with firm heterogeneity and endogenous differences in the "toughness" of competition across markets, in terms of the number and average productivity of competing firms.
Abstract: We develop a monopolistically competitive model of trade with firm heterogeneity—in terms of productivity differences—and endogenous differences in the “toughness” of competition across markets—in terms of the number and average productivity of competing firms. We analyse how these features vary across markets of different size that are not perfectly integrated through trade; we then study the effects of different trade liberalization policies. In our model, market size and trade affect the toughness of competition, which then feeds back into the selection of heterogeneous producers and exporters in that market. Aggregate productivity and average mark-ups thus respond to both the size of a market and the extent of its integration through trade (larger, more integrated markets exhibit higher productivity and lower mark-ups). Our model remains highly tractable, even when extended to a general framework with multiple asymmetric countries integrated to different extents through asymmetric trade costs. We believe this provides a useful modelling framework that is particularly well suited to the analysis of trade and regional integration policy scenarios in an environment with heterogeneous firms and endogenous mark-ups.

2,002 citations

Report•DOI•
Misallocation and Manufacturing TFP in China and India

[...]

Chang-Tai Hsieh1, Peter J. Klenow2•
University of Chicago1, Stanford University2
01 Nov 2009-Quarterly Journal of Economics
TL;DR: This paper measured sizable gaps in marginal products of labor and capital across plants within narrowly defined industries in China and India compared with the United States, and calculated manufacturing TFP gains of 30%-50% in China, and 40%-60% in India.
Abstract: Resource misallocation can lower aggregate total factor productivity (TFP).We use microdata on manufacturing establishments to quantify the potential extent of misallocation in China and India versus the United States. We measure sizable gaps in marginal products of labor and capital across plants within narrowly defined industries in China and India compared with the United States. When capital and labor are hypothetically reallocated to equalize marginal products to the extent observed in the United States, we calculate manufacturing TFP gains of 30%–50% in China and 40%–60% in India.

1,995 citations

References
More filters
Journal Article•DOI•
Productivity and Turnover in the Export Market: Micro-level Evidence from the Republic of Korea and Taiwan (China)

[...]

Bee Yan Aw1, Sukkyun Chung, Mark J. Roberts2•
Pennsylvania State University1, National Bureau of Economic Research2
01 Jan 2000-The World Bank Economic Review
TL;DR: In this article, the authors analyzed the link between a producer's total factor productivity and its decision to participate in the export market, using manufacturing data from the Republic of Korea and Taiwan (China).
Abstract: Widespread empirical evidence indicates that exporting producers have higher productivity than non-exporters, although the reasons why are unclear. Some analysts argue that exporters acquire knowledge of new production methods, inputs, and product designs from their international contacts, and with this knowledge they achieve higher productivity than their more insulated domestic counterparts. Others argue that the higher productivity of exporters reflects the self-selection of more efficient producers into a highly competitive export market. This article analyzes the link between a producer's total factor productivity and its decision to participate in the export market, using manufacturing data from the Republic of Korea and Taiwan (China). Differences are found between these two economies in the importance of selection and learning. In Taiwan (China) transitions of plants into and out of the export market reflect systematic variations in productivity as predicted by self-selection models. In Korea there are no significant changes in productivity following entry or exit from the export market that are consistent with learning from exporting. A comparison of the two economies suggests that in Korea factors other than production efficiency are more prominent determinants of the export decision.

799 citations

Journal Article•DOI•
Market Entry Costs, Producer Heterogeneity, and Export Dynamics

[...]

Sanghamitra Das1, Mark J. Roberts2, James Tybout2•
Indian Statistical Institute1, National Bureau of Economic Research2
01 May 2007-Econometrica
TL;DR: In this paper, the authors developed a dynamic structural model of export supply that characterizes these two decisions, and fit this model to plant-level panel data on three Colombian manufacturing industries, and used them to simulate export responses to shifts in the exchange-rate process and several types of export subsidies.
Abstract: As the exchange rate, foreign demand, and production costs evolve, domestic producers are continually faced with two choices: whether to be an exporter and, if so, how much to export. We develop a dynamic structural model of export supply that characterizes these two decisions. The model embodies plant-level heterogeneity in export profits, uncertainty about the determinants of future profits, and market entry costs for new exporters. Using a Bayesian Monte Carlo Markov chain estimator, we fit this model to plant-level panel data on three Colombian manufacturing industries. We obtain profit function and sunk entry cost coefficients, and use them to simulate export responses to shifts in the exchange-rate process and several types of export subsidies. In each case, the aggregate export response depends on entry costs, expectations about the exchange rate process, prior exporting experience, and producer heterogeneity. Export revenue subsidies are far more effective at stimulating exports than policies that subsidize entry costs.

587 citations

Report•DOI•
Export Entry and Exit by German Firms

[...]

Andrew B. Bernard, Joachim Wagner
01 Mar 2001-Weltwirtschaftliches Archiv-review of World Economics
TL;DR: In this article, the authors present a dynamic model of the export decision by a profit-maximizing firm, using a panel of German manufacturing plants, and test for the role of plant characteristics and sunk costs in the entry decision.
Abstract: Export Entry and Exit by German Firms. — While exports have played an important role in German business cycles, little is known about the export supply response of German firms. This paper presents a dynamic model of the export decision by a profit-maximizing firm. Using a panel of German manufacturing plants, we test for the role of plant characteristics and sunk costs in the entry decision. We find evidence for substantial sunk costs: exporting today by a plant increases the probability by 50 percent that the plant will export tomorrow. This advantage depreciates quickly, falling by two-thirds in a year. The authors also find evidence that plant success, as measured by size and productivity, increases the likelihood of exporting.

311 citations

Posted Content•
Export versus FDI

[...]

Elhanan Helpman, Marc J. Melitz, Stephen R. Yeaple
01 Jan 2003-Research Papers in Economics
TL;DR: In this paper, a multi-country, multi-sector general equilibrium model is proposed to explain the decision of heterogeneous firms to serve foreign markets either through exports or local subsidiary sales.
Abstract: This paper builds a multi-country, multi-sector general equilibrium model that explains the decision of heterogeneous firms to serve foreign markets either through exports or local subsidiary sales (FDI). These modes of market access involve different relative costs, some of which are sunk while others vary with sales volume (such as transport costs and tariffs). Relative to investment in a subsidiary, exporting involves lower sunk costs but higher per-unit costs. In equilibrium, only the more productive firms choose to serve the foreign markets and the most productive among this group will further choose to serve the overseas market via FDI. The paper then explores several implications of the individual firms' decisions for aggregate export and FDI sales relative to the domestic and foreign market sizes. In particular, it is shown that firm level heterogeneity is an important determinant of relative export and FDI flows. We use the model to derive testable empirical predictions on the relative aggregate export and FDI sales in a given country for a given sector based both on relative costs and the extent of firm level heterogeneity in that sector. These predictions are tested on data of US affiliate sales and US exports in 38 different countries and 52 sectors. The comparative statics based on relative costs are very similar to those tested by Brainard (AER 1997) and are confirmed in our data: sector/country specific transport costs and tariffs have a strong negative effect on export sales relative to FDI. More importantly, our new predictions for the effects of firm-level heterogeneity on the relative export and FDI sales are also strongly supported by the data: more heterogeneity leads to significantly more FDI sales relative to export sales.

233 citations

Report•DOI•
Exporting and Productivity

[...]

Andrew B. Bernard, J. Bradford Jensen
01 May 1999-Research Papers in Economics
TL;DR: In this article, the authors examined whether exporting has played any role in increasing productivity growth in U.S. manufacturing and found no evidence that exporting increases plant productivity growth rates, but within the same industry, exporters do grow faster than non-exporters in terms of both shipments and employment.
Abstract: Exporting is often touted as a way to increase economic growth. This paper examines whether exporting has played any role in increasing productivity growth in U.S. manufacturing. Contemporaneous levels of exports and productivity are indeed positively correlated across manufacturing industries. However, tests on industry data show causality from productivity to exporting but not the reverse. While exporting plants have substantially higher productivity levels, we find no evidence that exporting increases plant productivity growth rates. However, within the same industry, exporters do grow faster than non-exporters in terms of both shipments and employment. We show that exporting is associated with the reallocation of resources from less efficient to more efficient plants. In the aggregate, these reallocation effects are quite large, making up over 40 percent of total factor productivity growth in the manufacturing sector. Half of this reallocation to more productive plants occurs within industries and the direction of the reallocation is towards exporting plants. The positive contribution of exporters even shows up in import-competing industries and non-tradable sectors. The overall contribution of exporters to manufacturing productivity growth far exceeds their shares of employment and output.

176 citations

Related Papers (5)
Export Versus FDI with Heterogeneous Firms

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Exceptional exporter performance : cause, effect, or both?

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Frequently Asked Questions (10)
Q1. What are the contributions in "Nber working paper series the impact of trade on intra-industry reallocations and aggregate industry productivity" ?

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. 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. It then shows how further increases in the industry 's exposure to trade lead to additional inter-firm reallocations towards more productive firms. 

some studies have also found evidence that reallocations unrelated to entry and exit contribute to 1Firm age and capital vintage are other important explanatory characteristics that have been highlighted in some studies, although their impact may be limited to their effect on productivity. 

As ϕ∗ increases, the probability of successful entry (pin = 1−G(ϕ∗)) decreases average proÞts must therefore increase for Þrms to remain indifferent about entry. 

This export market selection effect and the domestic market selection effect (of Þrms out of the industry) both reallocate market shares towards more efficient Þrms and contribute to an aggregate productivity gain. 

Since the average revenue level is always positive (even when ϕ∗ → 0), the ratio of the average to cutoff Þrm revenue becomes inÞnite as ϕ∗ goes to zero: 

These trade-induced reallocations towards more efficient Þrms explain why trade may generate aggregate productivity gains without necessarily improving the productive efficiency of individual Þrms. 

Although the direction of the change in product variety is ambiguous (product variety will decrease so long as the ZCP curve is downward sloping), the decrease in aggregate productivity is enough to unambiguously entail a welfare loss (see appendix for proof). 

The absence of an upper bound on productivity is assumed only for simplicity; an upper bound can be incorporated in the analysis without qualitatively changing any of the main results. 

Tybout and Westbrook (1995) test and reject the hypothesis that increased productivity in Mexico s growing export industries was driven by increases in the scale of plant production. 

Hopenhayn shows how these dynamics shape the equilibrium distribution of Þrm productivity and analyzes the impact of these dynamics on Þrm value and the performance of cohorts of Þrms over time.