The Impact of Trade Liberalization on Productivity Within and Across Industries: Theory and Evidence

Josh Ederington and Phillip McCalman

No 24-07, Monash Economics Working Papers from Monash University, Department of Economics

Abstract: Numerous studies have investigated the link between trade policy and firm productivity. Despite justifying firm level analysis on the basis of considerable heterogeneity between firms within narrowly defined industries, these studies typically constrain all firms to have the same expected response to changes in trade policy. In this paper we develop a theoretical model that accounts for the existence of firm level heterogeneity within industries and predicts that the equilibrium response to changes in trade policy will also be heterogeneous in terms of both sign and size. The variation in firm level reaction is shown to be determined by both firm and industry characteristics and therefore the equilibrium response to trade policy is predicted to vary not only within industries but also across industries. These results allow us to use both sources of variation in the data. We examine these predictions on a firm level data set for the Colombian manufacturing sector in the 1980’s and find strong support for them.

Keywords: tariffs; technology diffusion; productivity. (search for similar items in EconPapers)
JEL-codes: F10 F12 F13 F14 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2007
New Economics Papers: this item is included in nep-eff and nep-int
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Citations: View citations in EconPapers (14)

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