Assessing Productivity Gains from International Trade in a Small Open Economy

Empirical evidence suggests that exporter firms tend to charge higher markups than non-exporters due to trade barriers. The exporters’ markup premium, however, may disappear in a special case, namely when the home country is small relative to its trade partners and trade barriers are low. This can be because competition is more intense in the large export destination than in the small home country, so that firms are able to set higher markups for locally sold products but not for exports. This paper provides empirical evidence on the validity of this special case by estimating markups for firms in Luxembourg who generally export to larger countries. The estimated negative markup premium for exporters has important implications for the productivity measurement. In a sufficiently small open economy, exporters’ productivity may be biased downward, when the firm-level markup variation is not controlled for in the productivity estimation. The bias in the productivity estimates further leads to the inaccurate conclusion that openness to international trade lowers allocative efficiency.     

Markups and export-pricing strategies

We analyze empirically export-price strategies across export destinations using detailed firm-product data. Most recent studies using disaggregated data to investigate why firms charge different prices for the same product on different markets focus on the cost component of prices and neglect the markup component. In this paper, we concentrate on the markup component and examine how variations in firms’ export prices may reflect price discrimination by comparing the markup of firms with different pricing strategies. We make use of detailed firm-level data for exporting firms in the Swedish food sector consisting of both manufacturing and intermediary trading firms. The paper documents the export-price variations within the two sub-sectors and explores how different price strategies correlate with markups. The results offer new information beyond the fact that exporters tend to have a higher markup. In particular, we find that firms in the food-processing sector with a greater ability to discriminate across markets mark their products up even more. This result points to the importance of underlying firm decisions in order to explain differences in export premiums across firms. In addition, the results reveal that markups are a complex function of firm and destination characteristics, and that the relationship between markups and pricing strategies in the manufacturing sector is not necessarily observed in other sectors of the supply chain.     

Firms’ heterogeneity,demand accumulating,and exchange rate pass-through

In this article, we study how the export behaviors of new and incumbent exporters differentially respond to exchange rate shocks. We establish a dynamic model, in which new exporters strategically charge a lower price than incumbent exporters to grow their customer base and increase future sales. The model predicts that new exporters adjust their prices more aggressively relative to their incumbent counterparts in response to exchange rate fluctuations. Using a transaction-level data set containing all Chinese exporters during the 2000–2009 period, we find supporting evidence for the model's predictions: new exporters adjust their price 1.5 times more than incumbent exporters. This, in turn, results in export quantities being less responsive to exchange rate shocks among new exporters. The result holds for a series of robustness checks. The findings imply that there are different degrees of exchange rate pass-through among new and incumbent exporters.     

Does quality differentiation matter in exporters' pricing behaviour? Comparing China and India

The product quality dimension has been rarely mentioned as a factor explaining the heterogeneous pricing strategies of exporters. This could underestimate the degree of mark-up adjustment and the extent of incomplete exchange rate pass-through (ERPT) at a disaggregated level across products and destination markets. This paper investigates the role of quality differentiation in price discrimination using data for China and India's exports disaggregated at the 6-digit product level across destination markets. The paper adopts an empirical approach that incorporates gravity model explanatory factors and allows disentangling the effect of quality on trade prices and volumes from that of other sources of price variation. After excluding short duration export spells, China's export prices denominated in foreign currency terms increase with the yuan's depreciation, implying an increase in exporters' mark-ups, but they decrease as expected in the case of India. However, mark-up increases decline with product quality and destination market income, as the elasticity of demand perceived by exporters increases. These findings remain robust to different measures of quality, samples, specifications, and to the potential endogeneity of quality.     

Pricing to market, firm heterogeneity and the role of quality

We build a pricing-to-market (PTM) model with firm heterogeneity, which allows for imperfect competition and market segmentation in the presence of flexible exchange rates, horizontal and vertical differentiation and different tastes of consumers in destination markets. We derive firm’s pricing behaviour in response to price and quality competition shocks. We show that there is PTM heterogeneity across firms if quality has a role. We empirically assess the main predictions of our theoretical framework on Italian firm-level data. We document that export-domestic price margins are significantly affected by price and quality competitiveness factors even controlling for foreign demand conditions, size, export intensity, destination markets and unobservables. Finally, we provide evidence of strong heterogeneity across firms in their reaction to price and quality competitiveness.     

Labor price distortion and export product markups: Evidence from China labor market

In the context of expanding the new pattern of opening-up, how to improve export product markups is of great significance to China's high-quality export development. This paper systematically investigates the impact of labor price distortion on the markups of export products by using the combined data of Chinese industrial enterprise database and customs database from 2000 to 2013. The results show that labor price distortion significantly inhibits the increase of export product markups of China's manufacturing enterprises, and the above conclusion is still robust after using various methods for robustness test, but this effect is heterogeneous due to different factor intensity, export destination, trade mode, region and ownership. The mechanism tests demonstrate that labor price distortion inhibits the increase of markups through inhibiting R&D innovation, reducing factor allocation efficiency and causing low efficiency of enterprise scale, among which R&D innovation is the most important channel. In addition, this paper examines the impact of labor price distortion on the change of industry aggregated markups, and finds that intra-enterprise effect and entry effect are the main channels for labor price distortion to inhibit industry aggregated markups, while inter-enterprise effect and exit effect have little impact on industry aggregated markups. Our findings provide a new perspective for reinterpreting the mystery of low markups of Chinese export product, and provides an important decision-making basis for the improvement of China's export product markups.     

市场相似性、路径依赖与出口市场扩张——基于2000—2011年中国海关HS-6产品数据的检验

为了检验市场相似性对我国产品进入新市场的影响，采用2000—2011年中国海关HS-6产品数据建立起大约237万个“产品-市场-年份”三维观测样本，并运用二值Logit模型对此面板数据进行回归，发现出口市场扩张是存在“路径依赖”的，即企业倾向选择那些与其之前出口市场地理相近、文化相似、经济相似的国家作为新进入的市场。相似市场的出口经验，不仅在同类产品之间产生了显著的信息溢出，而且对除石油之外不同种类产品的新市场进入也具有显著的积极影响。基于Rauch（1999）分类标准的结果则进一步发现，与同质产品相比，差异产品的出口扩张更显著地受到市场相似性的影响。     

Markup Variation and Productivity Measurement in Singapore*

Conventional measures of total factor productivity using growth accounting may not be appropriate when there is variation in markups across industries. The existence of market power implies that total factor productivity contains an endogenous component related to the variation in markups. I examine the variation of markups at the industry level for the manufacturing and services sectors in Singapore from 1983 to 2003. Using two different measures, I find that the markups in Singapore are significant in most industries, at around 28 and 55percent for the manufacturing and services sectors, respectively. Markups for the services sector declined during the period, while the markups for the key manufacturing industries increased after the Asian financial crisis in 1997. Accounting for variation in markups suggests that improvement in technological progress tends to be underestimated by 0.5–1.0percent per year. The underestimation is more severe in industries with relatively high markups.     

Endogenous Markups,Intensity of Competition,and Persistence of Business Cycles

In order to study the propagation mechanism of business cycles, in particular to investigate how the intensity of competition affects market structure and output persistence over business cycles, this paper presents a real business-cycle model with imperfect competition and increasing returns to scale. This analysis considers the markups of price over cost to be endogenous. With endogenous markups, two standard forms of oligopolistic competition—Bertrand and Cournot—are considered. Results show that: (1) the propagation mechanism in the sense of output persistence is greater under Cournot; (2) the propagation mechanism is unequivocally greater with imperfect competition, regardless of whether markups are endogenous or not; and (3) under imperfect competition, the propagation mechanism is greater with endogenous markups than with exogenous markups. Overall, these results suggest that more intense competition produces lower persistence in output growth and, thus, a weaker propagation mechanism. In a calibration exercise, these differences were also found to be quantitatively important.     

Skilled-Labor Intensity Differences Across Firms,Endogenous Product Quality,and Wage Inequality

This paper proposes a theory to explain the relative wage-rate increase for skilled labor that results from trade liberalization that relies on within-sector reallocations of production resources (skilled and unskilled labor) across firms. Motivated by some stylized facts, in a model with firm heterogeneity, including firms that differ in their skill intensity even within a narrowly defined industry, firms with relatively high skill intensity that are more likely to be exporters, and a positive association between a firm’s skill intensity and its product quality, I develop a general equilibrium model where firms with a higher skill intensity endogenously choose a higher-quality product, and tend to be more profitable. In this framework, a reduction in trade costs allows members of the workforce to reallocate to more efficient firms that produce higher-quality products, using their skilled labor more intensively, resulting in a rising skill premium. The main sources of the increasing wage inequality that followed trade openness are a positive link between a firm’s skill intensity, its product quality, and quality competition.     

The reverse home-market effect in exports: a cross-country study of the extensive margin of exports

Do small countries have higher proportions of firms that export in manufacturing industries than large ones? As small countries are well known to be more open than large ones, it may appear uncontroversial to claim that the answer is yes. Nevertheless, this contradicts predictions from many standard trade models positing a home-market effect in the number of manufacturing firms and exporters. In this article, I present a theoretical model where a home-market effect in the number of firms coexists with a reverse home-market effect in the number of exporters: as in standard models, the number of firms in a small country relative to that in a large one is lower than relative income, but, in contrast to standard models, the relative number of exporters is larger. As a consequence, small countries will have higher proportions firms that export in manufacturing industries—a claim I support empirically.     

Measuring the market power in the ceramic tile industry: An international comparison

This paper measures the degree of competition faced by Spanish and Italian exporters of ceramic tiles in several European Union member states. The results indicate that Spanish producers have a substantial market power while Italian exporters face a high degree of competition. This finding is consistent with the significant gain (loss) in the world production and export shares that Spanish (Italian) producers experienced during the 1990s. The results are also consistent with accounting data. Furthermore, comparisons in the extent of market power across source countries and European destination markets reveal that most variation in the data is related to the source country. JEL no. F12, F14, L13, L60     

An open economy general equilibrium model with heterogeneous producers, a homothetic utility function and endogenous elasticity

Recent monopolistic competition models have identified three main sources of the gains from trade: (1) the introduction of new varieties for consumers, (2) an improvement in efficiency through the exit of low-productivity firms, and (3) a reduction in firms’ markups through import competition. In this paper, we extend Feenstra (Economics Letters, 78(1):79–86, 2003) to develop a model with producers heterogeneous in productivity to capture these gains. Here, firm markups are decreasing with market share, and trade introduces new varieties to consumers and reduces the market share of domestic firms. This reduces markups and profits and forces low-productivity firms to exit. This pro-competitive effect on the distribution of productivity contrasts with the conventional export-driven mechanism in a constant elasticity setup. We can usefully extend this model for further study because of the homotheticity of the utility function and the tractability of the model.     

A regime-switching analysis of pass-through

We empirically investigate how various economic factors affect the changes in the pricing policies of exporters, in particular changes in the exchange rate pass-through. Assuming exporters set prices following either a high or a low pass-through pricing policy, and assuming that the transition probabilities between these pricing policies depend on market concentration, exporting country??s market share and monetary stability, we estimate a Markov regime-switching model, using data we have collected on imported cars to the United States. Our findings show that the ??low pass-through?? regime is characterized by: lower exchange rate pass-through, low response to misalignments in the firm??s relative price, low volatility of exogenous shocks, and higher duration. When we decompose the changes in the pass-through in our sample, we find that monetary stability has been the most important factor behind the decline in the pass-through. Monetary stability explains more than 50% of the decline in the exchange rate pass-through, while country market share and market concentration explain about 25 and 10%, respectively.     

Competition in the Chinese market: Foreign firms and markups

This study addresses the issues of whether foreign firms outperform domestic firms in markups and whether the presence of foreign firms dampens the markup of their local counterparts in the Chinese market. Analysis of a firm-level panel dataset, we find foreign-invested enterprises (FIEs), particularly those not from Hong Kong–Macau–Taiwan, charging a higher markup. Estimations on the determinants of markups highlight the important roles played by technological capability and intangible assets. The potential channels and mechanisms are also discussed. Entering the Chinese market through joint ventures helps FIEs raise markups, and this effect is notable for HMT–FIEs, which might have a relative advantage of cultural proximity than other FIEs. Sharing equality with national capital to construct political connection (guanxi) also helps facilitate markups. Crucially, foreign presence is positively related to local firms’ markups, suggesting that the spillover and linkage effects dominate the competition pressure brought about by foreign direct investment.     

Impact of European food safety border inspections on agri-food exports: Evidence from Chinese firms

The cost of complying with a sanitary standard is certain. However, such measure introduces uncertainty for exporters in relation to border rejections. Shipments may fail to pass inspections and may be refused entry into the importing country. This risk is shaped by variance in the quality of the exported product, and the stringency of the border controls. We examine how the risk of rejection at European borders on safety grounds is affecting Chinese agri-food exporters. We combine information from the European Rapid Alert System for Food and Feed with Chinese firm-level export data by product, destination and year for the period 2000–2011. Information externalities and reputation effects are important. Border rejections amplify the turnover among firms at the extensive margin of trade. This risk is curbing small exporters and resulting in a concentration of Chinese exports among big exporters.     

我国出口汇率传递的非对称性:来自中日贸易的证据

文章扩展了Yang（2007）的厂商定价模型，对汇率传递非对称性、特点和成立条件进行理论分析，发现对称传递需要满足严格的条件，而现实中更常见的是非对称汇率传递。在一定条件下，商品需求弹性越大，越可能呈现出口国货币贬值传递率高而升值传递率低的特点。利用2000年1月至2011年12月我国出口日本的966种商品价格数据，发现汇率波动向价格传递具有非对称性：（1）人民币升值时，日元价格上涨较少；而贬值时，价格下降较多。我国出口商品的需求弹性较大，在日本市场上面对的是一个强竞争结构。（2）若月度升值超过一定幅度（测算约为2.43%），传递率又会有所上升，说明尽管日元价格易跌难涨，但在升值导致成本上涨较多、明显挤压利润时，厂商不得不适当提高日元售价。采用2000年至2018年9月日本从中国进口单位价值指数进行稳健性检验，得出类似结论。现阶段稳定的人民币名义汇率对我国出口企业是更为有利的。     

Product and destination mix in export markets

This article studies the joint destination and product strategies of exporters, using the universe of export transactions for firms located in Portugal in the period 1995–2005. The article breaks down the annual growth rate of total exports along different margins and details choices made by multi-product, multi-destination firms regarding their export portfolio. In addition, the article looks at similar features for the subsample of new exporters. We find that both the firm-level extensive and intensive margins are important in driving the year-to-year variation in aggregate exports. However, variation over time in the sales of continuing exporters is mainly driven by their sales in continuing destinations. In addition, a product’s export tenure within a firm varies largely across currently exported products in the context of an intense activity of product and destination switching. Moreover, the higher the importance of a product, the more its sales are concentrated in the firm’s top destination. Finally, the article finds that, while continuing exporters enter new markets mainly by selling old products, new exporters access new destinations mainly by exporting new products.     

Export Performance and Destination Characteristics of Irish Manufacturing Industry

Recent research has sought to explore whether exporting enterprises have superior performance characteristics relative to non-exporters, and whether such superiority is associated with performance pre- and/or post-exporting. This paper extends existing research by examining the influence of export market destination on firm performance. It explores these issues using micro data on Irish manufacturing between 1991 and 1998, a time period during which Ireland experienced rapid export-driven growth. The study provides further evidence of the superior characteristics of exporters relative to non-exporters and supports the self-selection hypothesis that superior enterprises are more likely to export. We find export destination matters: the performance characteristics of enterprises that export globally differ from those that export locally. JEL no. F14     

Towards a welfare model of trade and multinational firms with oligopolistic competition

This paper constructs a general equilibrium model in a world with two-symmetric countries. It explains welfare gains from international trade and horizontal Foreign Direct Investment (FDI) in the economy with firm heterogeneity and variable markups stemming from oligopolistic competition. My model shows that the pro-competitive effects of trade and horizontal FDI happen because trade openness induces an increase in product market competition that reduces markups and toughens selection, increasing aggregate productivity. The most significant contribution of the paper is that multinational firms, via horizontal FDI, produce the most significant welfare gains through the toughest selection and lowest markups.