Firm heterogeneity and trade Giovanni Marin Department of - - PowerPoint PPT Presentation

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

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Comparison of models: Assumptions

Ricardo HOS Krugman Production factors 1 2

• Within-country mobility of

inputs Yes Yes Yes Between-country mobility of inputs No No No Technology / productivity Heterogeneous Homogeneous Homogeneous Relative factors’ endowment

• Heterogeneous
• Trade frictions

No No No Returns to scale Constant Constant Increasing Commodities Homogeneous Homogeneous Heterogeneous (varieties)

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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

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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)

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Firm heterogeneity in labour productivity (in log)

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.2 .4 .6 .8 8 10 12 14 log(Value added per employee)

Firms in the chemical sector in Italy Year 2011 Source: AIDA

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

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Figure 4.8 Export orientation of US manufacturing firms, 2002

Export orientation of US manufacturing firms, 2002

5 10 15 20 25 30 35 40

Miscellaneous Manufacturing Printing and Related Support Furniture and Related Product Apparel Manufacturing Wood Product Manufacturing Nonmetallic Mineral Product Food Manufacturing Textile Product Mills Fabricated Metal Product Petroleum and Coal Products Beverage and Tobacco Product Leather and Allied Product Paper Manufacturing Textile Mills Plastics and Rubber Products Transportation Equipment Primary Metal Manufacturing Machinery Manufacturing Chemical Manufacturing Computer and Electronic Product Electrical Equipment Appliance

percent of firms that export Average for US manufacturing

Source: van Marrewijk (2012), based on Bernard et al. (2007, Table 2).

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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?

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Firm heterogeneity (Italy)

Exporter premia (%) Size (employees) 69.5 Labour productivity (VA per employee) 11.4 Capital stock per employee 18.9 Share of graduates 23.5 Probability of doing R&D 17 Probability of adopting a product innovation 14.4 Probability of adopting a process innovation 9.7 Probability of applying for a patent 4.2 Probability of doing FDI 1.9

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Italian manufacturing firms. Sector and year dummies included. Source: Mediocredito Centrale, years 1995-2007

Firm heterogeneity (US)

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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.

Firm heterogeneity

• Exporting firms are:

– Larger – More capital intensive – With a more skilled labour force – More productive – More innovative

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Figure 4.9 Distribution by number of products and export destinations; USA, 2000

1 2 3 4 5+ 1 2 3 4 5+ 11.9 40.4 20 40 60 80 100 Share of exporting firms # countries # products

• a. Share of exporting firms

1 2 3 4 5+ 1 2 3 4 5+ 92.2 20 40 60 80 100 Share of export value # countries # products

• b. Share of export value

Source: van Marrewijk (2012), based on data from Bernard et al. (2007, Table 4).

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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

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Figure 4.10 Simultaneous exporting and importing; US manufacturing, 1997

US manufacturing; exporting and importing per sector 10 20 30 40 50 60 70 10 20 30 40 50 60 70 percent of firms that export percent of firms that import Aggregate Manufacturing average diagonal regression line Computer and Electronic Product Printing and Related Support Leather and Allied Product

Source: van Marrewijk (2012, based on data from Bernard et al. (2007, Table 7).

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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

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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

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q3 profit demand mr c1 c2 c3 p1 p2 q2 q1 quantity price, mc, mr mc p3 (p3-c3)q3 (p2-c2)q2 (p1-c1)q1

(p1-c1)q1 (p2-c2)q2

E1 E2 E3 Figure 4.11 Firm heterogeneity, prices, and profits

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profit demand before trade quantity price mc firms exit firms make lower profits firms make higher profits demand after trade c3 c4 c5 profit before trade profit after trade Figure 4.12 Firm heterogeneity and trade

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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

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Trade and selection

• Trade induce a counterclock wise rotation of the demand

curve  demand becomes more elastic

• As we will see in the coming classes, firms that engage in

trade need to incur in a series of fixed costs of exporting 

• nly firms with a sufficiently high productivity can bear the

fixed cost of exporting

– Least productive firms will exit the market – Firms with intermediate productivity remain on the market but cannot bear the fixed cost of exporting – Firms with high productivity increase their market share and also export

• Doing FDI is even more ‘costly’  further selection

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Exporter premia (%) FDI premia (%) Size (employees) 69.5 164.0 Labour productivity (VA per employee) 11.4 11.1 Capital stock per employee 18.9 22.4 Share of graduates 23.5 23.4 Probability of doing R&D 17 29.5 Probability of adopting a product innovation 14.4 24.3 Probability of adopting a process innovation 9.7 16.3 Probability of applying for a patent 4.2 11.4 Probability of doing FDI 1.9

• Probability of exporting
• 20.7

22

.2 .4 .6 .8 1

• 2
• 1

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