Quota removal and firm-level offshoring: Theory and evidence

Recent literature indicates that offshoring can effectively increase firm productivity and improve product quality. Therefore, global value chains have increased in importance. In this paper, we investigate the impact of export growth on firm-level offshoring. Removal of the quota on textile and clothing products in importing countries boosts China's exports of quota-restricted products. This removal offers a quasi-natural experiment. Using a difference-in-differences approach, we find that export growth induced by the quota removal increases the extensive and intensive margins of firm-level offshoring. The impact is more pronounced on domestic firms and firms that are engaged in ordinary trade. Our findings suggest additional gains from trade liberalization: trade liberalization not only boosts exports, but also enhances firm productivity and product quality through encouraging firm-level offshoring.     

Does international openness affect the productivity of local firms?

This paper examines how international openness can change firm productivity in south‐eastern Europe (SEE), a crucial question for middle‐income countries. Using firm‐level data for six transition economies over the 1995–2002 period, we identify whether foreign ownership and propensity to trade with more advanced countries can bring about higher learning effects. We find that: (i) foreign ownership has helped restructure and enhance the productivity of local firms in four out of six countries; (ii) exporting to advanced markets has a larger impact on productivity growth in four countries, especially when the firm's absorptive capacity is taken into account; (iii) in contrast, exporting to the less competitive markets of the former Yugoslavia seems to negatively affect productivity growth in three countries; and (iv) learning effects from importing are similar to those from exporting. Our results suggest that trade liberalization is not uniformly beneficial. Regional composition of trade flows and absorptive capacity of local firms matter. Thus, trade liberalization within the SEE region may not provide a substitute for a general trade liberalization which includes access to the more competitive markets of countries belonging to the Organization for Economic Co‐operation and Development.     

Does services liberalization affect manufacturing firms’ export performance? Evidence from India

This paper investigates the relationship between the reform of energy, telecommunications and transport services in India in the mid-1990s and manufacturing firms’ export performance. The empirical analysis relies on exogenous indicators of regulation of Indian services sectors and detailed firm-level data from India in the 1994–2004 period. I find that the reform of upstream services sector has increased the probability of exporting and export sales shares of firms producing in downstream manufacturing industries. The results suggest that the effect of services liberalization on manufacturing firms’ export performance is stronger for initially more productive firms. These empirical findings are robust to alternative econometric specifications that control for other reforms, industry, firm characteristics and that deal with potential reverse causality concerns.     

Trade liberalization and markups: Micro evidence from China

This paper presents evidence from highly disaggregated Chinese firm-product data that, given productivity, input tariff reductions induce an incumbent importer/exporter to increase product markups. We further investigate empirically the mechanisms underlying this trade liberalization effect, and find that input tariff reductions decrease marginal costs, and their effects on markup adjustments are more profound among firms with higher import dependence. Moreover, we exploit unique features of Chinese data by comparing results for two trade regimes: ordinary trade (wherein firms pay import tariffs to import) and processing trade (wherein firms are not subject to import tariffs). While the aforementioned trade liberalization effects and mechanisms only apply to ordinary trade, processing trade samples are used in a placebo test. The paper also shows that more productive firms charge higher markups for products. All these findings are robust to alternative markup measures including one estimate using physical-quantity output data, different production function specifications, a subsample consisting only of pure exporters, and estimations based on our theoretical derivations.     

Discontinuous innovation capability accumulation in latecomer natural resource-processing firms

Most of the studies that describe the building of innovation capability in emerging and developing economies have focused on the ways in which latecomer firms develop continuously towards advanced capability levels along existing technological trajectories, particularly for the assembled products industries, especially in Asia. A slightly different approach is adopted herein by focusing on pathways of discontinuous capability building of firms in natural resource-processing industries. By drawing on evidence from a variety of case studies taken from 13 forestry, pulp, and paper firms in Brazil in the period 1950-2007, it was found that: (1) in contrast with the majority of case studies reported in the literature, the pathways followed by firms in their accumulation of innovation capability involved a qualitative departure from the established technological trajectory at an early stage in the development of their capability; (2) the pathways of firms along the new technological trajectories were nevertheless characterised by a high degree of variability (from intermediate to world leading innovators) in terms of the levels and speeds of the accumulation of innovation capability; (3) firms that have attained progressively higher levels of innovative performance have more rapidly developed a combination of internal and external research-based arrangements in order to undertake increasingly complex, but firm-centred innovation efforts. This paper sheds some light on some of the discussions that relate to the role of natural resources in the patterns of industrial progress and growth in those countries endowed with particular natural resource-based industries. It also provides a methodological contribution to the study of the long-term innovation strategies that make use of the dynamics of capability building, especially within natural resource-processing industries.     

Structure and performance of the service sector in transition economies1

This paper examines the performance of the service sector in the Eastern European transition economies during the 1997–2004 period. The performance of the service sector as a whole and of its sub‐sectors is very heterogeneous within the region. Service sub‐sectors that are information and communications technology producers or users and those using skilled labour more intensively exhibit the highest labour productivity growth. Our estimates show a positive and significant effect of liberalization on service labour productivity growth that is stronger for sub‐sectors that are more distant from the technological frontier. Service liberalization is also shown to have a positive effect on labour productivity levels and growth of downstream manufacturing industries.     

Growth and risk at the industry level: The real effects of financial liberalization

This paper analyzes the effects of financial liberalization on growth and volatility at the industry level in a large sample of countries. We estimate the impact of liberalization on production, employment, firm entry, capital accumulation, and productivity. In order to overcome omitted variables concerns, we employ a number of alternative difference-in-differences estimation strategies. We implement a propensity score matching algorithm to find a control group for each liberalizing country. In addition, we exploit variation in industry characteristics to obtain an alternative set of difference-in-differences estimates. Financial liberalization is found to have a positive effect on both growth and volatility of production across industries. The positive growth effect comes from increased entry of firms, higher capital accumulation, and an expansion in total employment. By contrast, we do not detect any effect of financial liberalization on measured productivity. Finally, the growth effects of liberalization appear temporary rather than permanent.     

Credibility, Irreversibility of Investment, and Liberalization Reforms in LDCs

Empirical evidence of the impact of policy uncertainty on aggregate investment is mixed. However, if the relationship between policy uncertainty and investment performance is nonlinear, linear regression exercises might not capture the effect of policy uncertainty. In this paper, I present a simple model with investment irreversibility which shows that, in the presence of legal constraints on investment in foreign assets, domestic real investment performance is poorer when liberalization reforms are only partially incredible .     

Animal spirits and the composition of innovation

This paper shows that the Schumpeterian model with both vertical and horizontal innovative research admits many more equilibria than the unique symmetric balanced growth path (BGP) usually highlighted in the literature. Each of a continuum of BGPs is characterized by a different composition of aggregate R&D (vertical versus horizontal).This appears if firms expect self-fulfilling “waves of enthusiasm” in the newly introduced sectors, as is very common in the real world. Pioneers are challenged by more outsiders and the first monopoly of every new good is likely to last less than in more mature industries: By expecting this horizontal innovation is depressed while vertical innovation is more intense. Such “waves of enthusiasm” have a positive effect on growth rates and a negative effect on consumption levels.     

Trade between symmetric countries,heterogeneous firms,and the skill premium

Abstract This paper examines the effects of trade liberalization between symmetric countries on the skill premium. I introduce skilled and unskilled labour in a model of trade with heterogeneous firms à la Melitz (2003) and assume a production technology such that more productive firms are more skill intensive. I show that the effects of trade liberalization on wage inequality crucially depend on the type of trade costs considered and on their initial size. While fixed costs of trade have a potentially non‐monotonic effect on the skill premium, a drop in variable trade costs unambiguously and substantially raises wage inequality.     

Tariff pass-through and the distributional effects of trade liberalization

This paper estimates the distribution of welfare gains due to the trade reforms in India by simultaneously considering the effect on prices of tradable goods and wages. The cost of consumption for each household is affected by the domestic price changes, while wage incomes adjust to these price changes in equilibrium. Three rounds of the Indian Employment and Consumption Surveys are used for the analysis. The price transmission mechanisms are estimated for both rural and urban areas to understand the extent to which the trade reforms are able to affect the domestic prices. In order to assess the distributional effects, a series of nonparametric local linear regressions are estimated. The findings show that households at all per capita expenditure levels had experienced gains as a result of the trade liberalization, while the average effect was generally pro-poor and varied significantly across the per capita expenditure spectrum.     

Knowledge appropriability, firm size, and growth

Empirical evidence shows that the number of patents per R&D dollar declines with firm size. In this paper, we propose a Schumpeterian growth model that accounts for this evidence. We analyze an economy with firms that engage in cost-reducing innovation resulting from the accumulation of both codified and tacit knowledge: the former occurs through the purchase of patents, while the latter is the result of R&D conducted in-house by firms. We study the relation between knowledge appropriability and market structure, and we show that a shift from patents to in-house research occurs as firm size gets larger. Since innovation statistics concentrate mainly on patents, this process of research reallocation results into an under-estimation of innovative activity and is responsible for the declining ratio of patents to R&D expenditure. Survey data on UK-based firms provide support to our results.     

Import competition and firm refocusing

Abstract Recent theoretical work predicts a new margin of firm adjustment to trade liberalization; that is, multi‐product firms alter their product mix to focus on their core competencies in response to trade liberalization. Using detailed product data from U.S. public firms, I find strong empirical support for this prediction. Specifically, import competition leads multi‐product firms to drop peripheral products to refocus on core production. The weaker the linkages that a peripheral product shares with the core (as measured by the extent of joint sales, joint procurement, joint production, and joint sectorship), the more likely the peripheral product is to be divested in response to import competition.     

Does trade stimulate product quality upgrading?

This paper investigates whether increased import competition leads firms to engage in incremental innovation reflected in product quality upgrading using Chilean manufacturing firm‐product data and measuring product quality with unit values (prices). We identify causal effects of import competition using an effective trade barrier measure – transport costs – as instruments for import penetration ratios across industries. Transport costs have a negative and significant effect on product quality. The evidence suggests that estimated unit value increases capture product quality upgrading, imports’ competition effects drive quality upgrading, and benefits depend on firms’ industrial specialization. Easier access to intermediate inputs also fosters quality upgrading.     

Impact of firm heterogeneity on direct and spillover effects of FDI: Micro-evidence from ten transition countries

This paper presents a comparative study of the importance of direct technology transfer and spillovers through FDI on a set of 10 transition countries, using a common methodology and appropriate methods to account for selection and simultaneity correction. This paper considers by far the largest firm level dataset (more than 90,000 firms) used by any study on the spillover effects of FDI. The main novelty of the paper is the explicit control for various sources of firm heterogeneity when accounting for different effects of FDI on firm performance. This work shows that the heterogeneity of firms in terms of absorptive capacity, size, productivity and technology levels affect the results. Controlling for these variables leads to some interesting results, which contrast with the previous empirical work in the field. We find that horizontal spillovers have become increasingly important over the last decade, and they may even become more important than vertical spillovers. Positive horizontal spillovers are equally distributed across size classes of firms, while negative horizontal spillovers seem to be more likely to accrue to smaller firms. Moreover, positive horizontal spillovers seem more likely to be present in medium or high productivity firms with higher absorptive capacities, while negative horizontal spillovers are more likely to affect low to medium productivity firms. These findings suggest that both direct effects from foreign ownership as well as the spillovers from foreign firms substantially depend on the absorptive capacity and productivity level of individual firms. In addition, these results show that foreign presence may also affect smaller firms to a larger extent than larger firms, but this impact may be in either direction.     

International trade and consumption network externalities

This paper studies the effects of trade liberalization in the presence of consumption network externalities. The framework is applicable to the choice of network products and sheds light on the debate on globalization and culture. In an extended Ricardian model of international trade the paper shows that: (i) trade is not Pareto inferior to autarky if the free trade equilibrium is unique; (ii) trade is not Pareto superior to autarky if both countries are diverse (network competition) under free trade, but can be if each country is homogenous (network monopoly); (iii) and when multiple free trade equilibria exist everybody in a country can lose from free trade if that country is homogenous under autarky. Consumers of imported network goods tend to gain, while consumers of exported network goods tend to lose from trade liberalization.     

Beyond the average effects: The distributional impacts of export promotion programs in developing countries

Do all exporters benefit the same from export promotion programs? Surprisingly, no matter how obvious this question may a priori be when thinking of the effectiveness of these programs, there is virtually no empirical evidence on how they affect export performance in different parts of the distribution of export outcomes. This paper aims at filling this gap in the literature. We assess the distributional impacts of trade promotion activities performing efficient semiparametric quantile treatment effect estimation on assistance, total sales, and highly disaggregated export data for the whole population of Chilean exporters over the 2002-2006 period. We find that these activities have indeed heterogeneous effects over the distribution of export performance, along both the extensive and intensive margins. In particular, smaller firms as measured by their total exports seem to benefit more from export promotion actions.     

Credit constraints,inequality and the growth gains from trade

This paper tests the hypothesis that, in the presence of credit constraints, higher wealth inequality affects negatively the growth gains from trade liberalisation. Variations in the growth rate of value added–decomposed in the growth rate of the number of establishments and the growth rate in average size–of manufacturing industries in 34 developing countries before and after trade liberalisation are used to study the effects of inequality on the difference in growth under liberalised and nonliberalised regimes. The results show that the number of firms in industries with high dependence on external finance in countries with higher inequality grow significantly slower, in both statistical and economic terms, than in industries with low dependence on external finance in countries with lower inequality following a trade liberalisation relative to the closed-economy period.     

Trade liberalization,forward‐looking firms,and welfare

We set up an oligopolistic model with two exporting firms selling to a third market to investigate the welfare implications of trade liberalization when the exporting firms are forward‐looking. The results show that with cost asymmetry trade liberalization encourages the exporting firms to engage in tacit collusion, which may not only be detrimental to the domestic welfare, but also to the consumer surplus of the importing country. Moreover, we find that tacit collusion is less sustainable if the government of the importing country imposes a lower (higher) tariff on the more (less) efficient exporting firm. If a nonforward‐looking or a forward‐looking cost‐efficient domestic firm exists in the importing country, then trade liberalization also encourages tacit collusion.     

Worker remittances,migration, accumulation and growth in poor developing countries: Survey and analysis of direct and indirect effects

A broad but brief survey of the literature on remittances and growth shows that indirect effects are only included via interaction terms. Then, we regress data for migration, worker remittances, savings, investment, tax revenues, public expenditure on education, interest rates, literacy, labor force growth, development aid and GDP per capita growth on migration, remittances and other variables for a panel of countries with income below $1200. The estimated dynamic equations are integrated to a system used for baseline simulations. Comparison with the counterfactual policy simulations ‘only 50% remittances’ or ‘no net migration anymore’ shows that the total effect of remittances on levels and growth rates of GDP per capita, investment and literacy are positive, and that of net migration is negative for literacy and investment but positive for growth.