I.S.E.O. Summer School, 20 th June 2017 Firms and Trade in the Global Economy Dimitra Petropoulou University of Surrey d.petropoulou@surrey.ac.uk
Lecture Roadmap 1. A (very) brief history of trade theory 2. Key facts about firms and trade: what do we know? 3. Rationalizing the stylized facts: the heterogeneous firms and trade literature; highlights and ongoing research 4. Implications for the effects of Brexit? 20/06/2012 I.S.E.O. Summer School: Firms and Trade in the Global Economy 2
1. A (very) brief history of trade theory The international trade literature addresses four key questions: 1. Why do countries trade? – Why do firms engage in importing/exporting (or not)? 2. What determines the pattern of trade? – Which firms trade which goods with which countries? 3. What are the effects of international trade on welfare? – Cross-sectoral and Intra-sectoral reallocations? 4. How should we formulate trade policy? – Effects of trade liberalisation; political economy of trade policy 20/06/2012 I.S.E.O. Summer School: Firms and Trade in the Global Economy 3
1. A (very) brief history of trade theory Classical Trade Theory: • T rade based on comparative advantage (opportunity cost differences) • Explains inter-industry trade flows between different countries • Basis for trade is cross-country differences in: – Productivity (Ricardian model; 19 th Century) – Factor abundance and cross-sectoral differences in factor intensity (Heckscher-Ohlin model; 1930s) • Many extensions (Specific Factors model, HOV etc) • Overall gains from trade from specialisation and exchange • Inter-sectoral reallocation arises from trade liberalisation, as CA sectors tend to expand, while non-CA sectors shrink • Winners and losers from trade • Firms? Not the focus…identical with CRS, perfect competition 20/06/2012 I.S.E.O. Summer School: Firms and Trade in the Global Economy 4
1. A (very) brief history of trade theory New Trade Theory: • Trade based on increasing returns to scale and love for product variety by consumers • Explains intra-industry trade flows between similar countries • Key models: – Krugman (1979, 1980) – Helpman and Krugman (1985) • Gains from trade through (no losers): – Increase in product variety – Lower prices (in 1979 model; competition effect) • Firms? Identical…all trade and make zero profit in equilibrium ….limited focus on the firms that actually drive trade flows. 20/06/2012 I.S.E.O. Summer School: Firms and Trade in the Global Economy 5
1. A (very) brief history of trade theory “New New Trade Theory”: • Mid-1990s and 2000s: many empirical studies based on firm-level micro datasets that track production and trade • Stylised facts about firms and trade emerge • Theoretical literature pioneered by Melitz (2003) – Labour productivity differs across firms; fixed cost of exporting – Research in trade research changed dramatically over the past 15 years – Multiproduct firms; selection into innovation, FDI etc; firm dynamics. • Effects from trade liberalisation? – Intra-sectoral reallocation of labour to more efficient firms as more productive firms expand and least productive firms exit – Aggregate industry productivity growth – A pro-competitive effect through lower markups (in some models) • Shift in focus from industries and countries to firms and products. 20/06/2012 I.S.E.O. Summer School: Firms and Trade in the Global Economy 6
2. Key facts about firms and trade • Fact 1: Firm exporting is a rare event – Of the 5.5 million firms operating in the US in 2000, just 4% engaged in exporting (Bernard et al., 2007a) – In industries predisposed to exporting 15% were exporters. – Substantial variation across industries …so is importing – Importing even rarer than exporting….again with substantial variation across industries. – The shares of exporting and importing firms are significantly positively correlated (0.87) across industries. – 41% of exporters also import; 79% of importers also export. – Similar patterns found in microdata from other countries 20/06/2012 I.S.E.O. Summer School: Firms and Trade in the Global Economy 7
Bernard et al., 2007a 8
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2. Key facts about firms and trade • Bernard et al (2003) – Approximately 200,000 plants in the Census – Low export participation and low export intensity…. – …yet 14% of gross U.S. manufacturing production was exported. • How can we reconcile this? – Key explanation: exporting plants are much bigger, shipping on average 5.6 times more than non-exporters. – Even excluding exports, plants that export ship 4.8 times as much to the U.S. market than their non-exporting counterparts. 20/06/2012 I.S.E.O. Summer School: Firms and Trade in the Global Economy 10
2. Key facts about firms and trade • Fact 2: Exporting firms are different from non-exporters (within the same disaggregated industry) – Exporters are 97% larger in employment – Exporters are 108% larger in shipments, – Exporters are more productive by 11% for value added per worker and 3% for total factor productivity – Exporters pay higher wages by approximately 6%. – Exporters are relatively more capital- and skill-intensive than non-exporters by approximately 12% and 11%, respectively. – Qualitatively similar results have been found for many other countries and time periods (including developing countries) 20/06/2012 I.S.E.O. Summer School: Firms and Trade in the Global Economy 11
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2. Key facts about firms and trade • Causality? Does high productivity induce firms to self-select into export markets or does exporting cause productivity growth through learning by exporting? – Evidence for many industries and countries confirms that high productivity precedes entry into export markets. – Suggestive of sunk costs of entry into export markets – Only the most productive firms find it profitable to incur this (Roberts & Tybout, 1997) – Early studies found no evidence of learning by exporting; some studies find evidence of productivity improvements following export, but overall the evidence is not compelling 20/06/2012 I.S.E.O. Summer School: Firms and Trade in the Global Economy 14
2. Key facts about firms and trade • Fact 3: Strong evidence of compositional effects across firms (within sectors) – There is a lot of firm entry, exit and market reallocation through job creation and job destruction – 1/3 of US manufacturing plants enter and exit every five years. Exitors are smaller on average than incumbents (Dunne et al, 1989) – Evidence of Darwinian selection across plants/firms 20/06/2012 I.S.E.O. Summer School: Firms and Trade in the Global Economy 15
Bernard and Jensen (2004) 16
2. Key facts about firms and trade • Fact 4: Trade Liberalisation raises aggregate industry productivity – Two-thirds of the 19% increase in aggregate productivity following Chile's trade liberalization of the late 1970s/1980s due to the relatively greater survival and growth of high- productivity plants (Pavcnik, 2002) – Many studies of trade liberalization reforms find similar results (Trefler, 2004; Bernard, Jensen and Schott, 2006a) – Within-industry reallocation of resources/employment found to dominate across-industry reallocations of resources/employment emphasised by comparative advantage models. – Simultaneous within-industry job creation and destruction. 20/06/2012 I.S.E.O. Summer School: Firms and Trade in the Global Economy 17
2. Key facts about firms and trade • Fact 5: Trade is highly concentrated – In 2000, the top 1% of trading firms by value (sum of imports plus exports) accounted for over 80% of the value of total trade, while the top 10 percent of trading firms accounted for over 95%. – The employment shares of the top 1% and 10% of trading firms were 14% and 24% respectively • Fact 6: Firms export multiple products to multiple destinations – In 2000, firms that export more than one (10 digit) product comprise 58% of exporting firms and account for more than 99% of export value. – Evidence of superstar firms 20/06/2012 I.S.E.O. Summer School: Firms and Trade in the Global Economy 18
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2. Key facts about firms and trade • Fact 7: Firm export dynamics – Eaton et al. (2008) – Colombian data for 1996 – 2005 – Each year nearly ½ of all Colombian exporters were not exporters in the previous year – New exporters are small and most do not continue exporting in the following year. – Total exports are instead dominated by a small number of large and stable exporters. – A fraction of new firms rapidly expand exports, and in less than a decade account for almost ½ of total export growth. – Firms typically begin exporting in a single foreign market and, if they survive, gradually expand into additional destinations. 20/06/2012 I.S.E.O. Summer School: Firms and Trade in the Global Economy 21
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