Firm heterogeneity and trade Giovanni Marin Department of Economics, Society, Politics Università degli Studi di Urbino ‘Carlo Bo’
References for this lecture • BBGV Chapter 4 – Paragraphs 4.7, 4.8 Spring 2018 Global Political Economy 2
Comparison of models: Assumptions Ricardo HOS Krugman Production factors 1 2 - Within-country mobility of Yes Yes Yes inputs Between-country mobility of No No No inputs Technology / productivity Heterogeneous Homogeneous Homogeneous Relative factors ’ endowment - Heterogeneous - Trade frictions No No No Returns to scale Constant Constant Increasing Heterogeneous Commodities Homogeneous Homogeneous (varieties) Spring 2018 Global Political Economy 3
Comparison of models Predictions of the model Ricardo HOS Krugman Inter-industry trade Yes Yes - Intra-industry trade No No Yes Full specialization Yes Not necessarily Yes (in varieties) Commodity price equalization Yes Yes - Factor(s) price equalization No Yes - Trade is mutually beneficial Yes Yes Yes Spring 2018 Global Political Economy 4
Trade and firm dynamics • The model of trade with monopolistic competition predicts a ‘ competition effect ’ • Some firms exit the market and the remaining firms gain market shares • The basic model , however, is based on the assumption of identical firms (except for the variety they produce) Spring 2018 Global Political Economy 5
Firm heterogeneity in labour productivity (in log) .8 .6 .4 .2 Firms in the chemical sector in Italy 0 8 10 12 14 Year 2011 log(Value added per employee) Source: AIDA Spring 2018 Global Political Economy 6
Firm heterogeneity and trade • Only few firms import or export • Also within sectors in which a country has comparative advantage (or is well endowed with the intensive factor), only a selection of firms actually exports Spring 2018 Global Political Economy 7
Figure 4.8 Export orientation of US manufacturing firms, 2002 Export orientation of US manufacturing firms, 2002 Electrical Equipment Appliance Computer and Electronic Product Chemical Manufacturing Machinery Manufacturing Primary Metal Manufacturing Transportation Equipment Plastics and Rubber Products Textile Mills Paper Manufacturing Leather and Allied Product Beverage and Tobacco Product Petroleum and Coal Products Fabricated Metal Product Textile Product Mills Food Manufacturing Nonmetallic Mineral Product Wood Product Manufacturing Average for US Apparel Manufacturing manufacturing Furniture and Related Product Printing and Related Support Miscellaneous Manufacturing 0 5 10 15 20 25 30 35 40 percent of firms that export 8 Source: van Marrewijk (2012), based on Bernard et al. (2007, Table 2).
Firm heterogeneity and trade • As only few firms actually trade , it is important to understand which are the characteristics of these firms • Are these firms larger ? Are they more ‘ efficient ’? Are they more productive ? Are they more technologically-endowed ? Spring 2018 Global Political Economy 9
Firm heterogeneity (Italy) Exporter premia (%) 69.5 Size (employees) Labour productivity (VA per employee) 11.4 Capital stock per employee 18.9 Share of graduates 23.5 17 Probability of doing R&D Probability of adopting a product innovation 14.4 Probability of adopting a process innovation 9.7 Probability of applying for a patent 4.2 1.9 Probability of doing FDI Italian manufacturing firms. Sector and year dummies included. Source: Mediocredito Centrale, years 1995-2007 Spring 2018 Global Political Economy 10
Firm heterogeneity (US) Table 4.3 Exporter premia in US manufacturing, 2002 Exporter premia (%) Employment 164 Shipments 194 Value-added per worker 12 TFP – total factor productivity 3 Wage 6 Capital per worker 13 Skill per worker 12 Additional covariates Industry fixed effects Source: based on Bernard et al. (2007, Table 3); all results are significant at the 1 percent level. Spring 2018 Global Political Economy 11
Firm heterogeneity • Exporting firms are: – Larger – More capital intensive – With a more skilled labour force – More productive – More innovative Spring 2018 Global Political Economy 12
Figure 4.9 Distribution by number of products and export destinations; USA, 2000 a. Share of exporting firms b. Share of export value 92.2 100 100 Share of exporting firms Share of export value 80 80 60 60 40.4 40 40 11.9 20 5+ 20 5+ 4 4 3 3 0 0 2 2 1 1 1 1 2 # products 3 2 # products 4 3 5+ 4 5+ # countries # countries 13 Source: van Marrewijk (2012), based on data from Bernard et al. (2007, Table 4).
Heterogeneity between exporting firms • Almost half (40.4) of US exporting firms just export one product to just one country • Firms that export five or more products to five or more countries account for 92.2 percent of total export Spring 2018 Global Political Economy 14
Figure 4.10 Simultaneous exporting and importing; US manufacturing, 1997 US manufacturing; exporting and importing per sector 70 diagonal 60 50 Leather and percent of firms that import Allied Product Computer and Electronic Product 40 regression line 30 20 Aggregate Manufacturing average 10 Printing and Related Support 0 0 10 20 30 40 50 60 70 percent of firms that export Spring 2018 Global Political Economy 15 Source: van Marrewijk (2012, based on data from Bernard et al. (2007, Table 7).
Import and export • There exist a positive correlation between exporting and importing • 41 percent of the exporting firms also import • 79 percent of importers also export Spring 2018 Global Political Economy 16
Trade and selection • For a given demand and market structure, firms with higher marginal costs make less profits than firms with lower marginal costs • If profits are below zero (due to too high marginal costs), the firm exits the market Spring 2018 Global Political Economy 17
Figure 4.11 Firm heterogeneity, prices, and profits price, mc mc, mr E 3 c 3 p 3 (p 3 -c 3 )q 3 demand p 2 (p 2 -c 2 )q 2 p 1 E 2 c 2 (p 2 -c 2 )q 2 (p 1 -c 1 )q 1 E 1 c 1 (p 1 -c 1 )q 1 mr q 3 q 2 q 1 quantity profit Spring 2018 Global Political Economy 18
Figure 4.12 Firm heterogeneity and trade price mc c 3 firms exit demand before trade c 4 firms make demand lower profits after trade c 5 profit after firms trade make higher profit profits before trade quantity profit Spring 2018 Global Political Economy 19
Trade and selection • Trade induce a counterclock wise rotation of the demand curve demand becomes more elastic • As we will see in the coming lectures, firms that engage in trade need to incur in a series of fixed costs of exporting only firms with a sufficiently high productivity can bear the fixed cost of exporting – Least productive firms will exit the market – Firms with intermediate productivity will remain on the market but cannot bear the fixed cost of exporting – Firms with high productivity will increase their market share and also export • Doing FDI is even more ‘ costly ’ further selection Spring 2018 Global Political Economy 20
Trade and selection Exporter premia FDI premia • Trade induce a counterclock wise rotation of the demand (%) (%) curve demand becomes more elastic Size (employees) 69.5 164.0 • As we will see in the coming classes, firms that engage in Labour productivity (VA per employee) 11.4 11.1 trade need to incur in a series of fixed costs of exporting 18.9 22.4 Capital stock per employee only firms with a sufficiently high productivity can bear the Share of graduates 23.5 23.4 fixed cost of exporting Probability of doing R&D 17 29.5 – Least productive firms will exit the market Probability of adopting a product innovation 14.4 24.3 – Firms with intermediate productivity remain on the market but 9.7 16.3 Probability of adopting a process innovation cannot bear the fixed cost of exporting Probability of applying for a patent 4.2 11.4 – Firms with high productivity increase their market share and Probability of doing FDI 1.9 - also export Probability of exporting - 20.7 • Doing FDI is even more ‘ costly ’ further selection Spring 2018 Global Political Economy 21
1 .8 .6 .4 .2 0 -2 -1 0 1 2 No FDI and no export Export FDI Italian manufacturing firms. Labour productivity partialled out of sector and year dummies. Source: Mediocredito Centrale, years 1995-2007 22
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