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

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This paper reviews research that uses longitudinal microdata to document productivity movements and to examine factors behind productivity growth. The research explores the dispersion of productivity across firms and establishments, the persistence of productivity differentials, the consequences of entry and exit, and the contribution of resource reallocation across firms to aggregate productivity growth. The research also reveals important factors correlated with productivity growth, such as managerial ability, technology use, human capital, and regulation. The more advanced literature in the field has begun to address the more difficult questions of the causality between these factors and productivity growth.

By relaxing the assumption of perfect competition, the “new” trade theory has generated a rich body of predictions concerning the effects of commercial policy on price-cost mark-ups, firm sizes, exports, productivity and profitability among domestic producers. This paper critically assesses the plant- and firm-level evidence on these linkages. Several robust findings are identified. First, mark-ups generally fall with import competition, but it is not clear whether this phenomenon reflect the elimination of market power or the creation of negative economic profits. Second, import-competing firms cut back their production levels when foreign competition intensifies, at least in the short run. This suggests that sunk entry or exit costs are important in most sectors. Third, trade rationalizes production in the sense that markets for the most efficient plants are expanded, but large import-competing firms tend to simultaneously contract. Fourth, exposure to foreign competition often improves intra-plant efficiency. Fifth, firms that engage in international activities tend to be larger, more productive, and supply higher quality products. However the literature is mixed on whether international activities cause these characteristics or vice versa. Finally, the short-run and long-run effects of commercial policy on exports and market structure can be quite different. Both types of response depend upon initial conditions, sunk entry costs, and the extent of firm heterogeneity.

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This paper estimates the effects of trade liberalization on plant productivity. In contrast to previous studies, we distinguish between productivity gains arising from lower tariffs on final goods relative to those on intermediate inputs. Lower output tariffs can produce productivity gains by inducing tougher import competition whereas cheaper imported inputs can raise productivity via learning, variety or quality effects. We use Indonesian manufacturing census data from 1991 to 2001, which includes plant level information on imported inputs. The results show that the largest gains arise from reducing input tariffs. A 10 percentage point fall in output tariffs increases productivity by about 1 percent, whereas an equivalent fall in input tariffs leads to a 3 percent productivity gain for all firms and an 11 percent productivity gain for importing firms.

This paper explores Colombian trade policy during 1977-1991, a period of substantial variation in protection across industries, to examine whether increased exposure to foreign competition generates plant-level productivity gains. Using a large panel of manufacturing plants, we find a strong positive impact of tariff liberalization on consistent productivity estimates, controlling for plant and industry heterogeneity. This result is not driven by the endogeneity of protection nor by plant exit. The impact of tariff liberalization on productivity is stronger for large plants and for plants in less competitive industries. Qualitatively similar results are obtained when using effective rates of protection and import penetration ratios as measures of protection.

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

We study the effects of the progressive elimination of the system of industrial regulations on entry and production, known as the “license raj”, on registered manufacturing output, employment, entry and investment across Indian states with different labor market regulations. The effects are found to be unequal depending on the institutional environment in which industries are embedded. In particular, following delicensing, industries located in states with pro-employer labor market institutions grew more quickly than those in pro-worker environments.

We investigate whether productivity differences explain why some manufacturers sell only to the domestic market while others serve foreign markets through exports and/or FDI. When overseas production offers no cost advantages, our model predicts that investors should be more productive than exporters. An extension allowing for low-cost foreign production can reverse this prediction. Data for 1070 large Japanese firms reveal that firms that invest abroad and export are more productive than firms that just export. Among overseas investors, more productive firms span a wider range of host-country income levels. JEL classification: F120, F230