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Trade, productivity and profitability: On profit levels and profit margins

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  • Marcel van den Berg
  • Charles van Marrewijk
  • Saara Tamminen

Abstract

Do firms engaging in international trade have higher or lower profit margins? It is well established that more productive firms engage in trading activities and as a result have higher profit levels. We use two theoretical models (the Melitz model and the Egger–Kreickemeier model) to clarify the relationship between productivity, trade activity, and profit margins and derive three hypotheses: (I) profit margins rise as productivity rises for domestic firms; (II) profit margins rise as productivity rises for trading firms; and (III) profit margins are not higher for trading firms than for domestic firms. We test these hypotheses using detailed micro‐data for Finland (2005–10) and the Netherlands (2002–10). We find strong support for Hypothesis I (in favour of the Melitz model), Hypothesis II (in favour of both models) and Hypothesis III (in favour of the Egger–Kreickemeier model). A propensity score matching analysis provides further support for Hypothesis III.

Suggested Citation

  • Marcel van den Berg & Charles van Marrewijk & Saara Tamminen, 2018. "Trade, productivity and profitability: On profit levels and profit margins," The World Economy, Wiley Blackwell, vol. 41(8), pages 2149-2174, August.
    • Handle: RePEc:bla:worlde:v:41:y:2018:i:8:p:2149-2174
    DOI: 10.1111/twec.12630
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    Cited by:

    1. Wang, Yan & Wang, Yue & Li, Ming-Xia, 2019. "Regional characteristics of sports industry profitability: Evidence from China’s province level data," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 525(C), pages 946-955.
    2. Lina Baranauskaitė & Daiva Jurevičienė, 2021. "Import Risks of Agricultural Products in Foreign Trade," Economies, MDPI, vol. 9(3), pages 1-15, July.
    3. Derrick W. H. Fung & Charles C. Yang & Jason J. H. Yeh, 2024. "The market price to embedded value gap: an analysis of European life insurers," Review of Quantitative Finance and Accounting, Springer, vol. 62(1), pages 69-96, January.

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