A model of trade liberalization and technology adoption withheterogeneous firms

This article demonstrates that the reason for a higher capital--labor ratio, observed for exporting firms, is a higher capital intensity of their production technology. Exporters are more productive, more likely to survive and, hence, more likely to repay loans. A higher repayment probability causes creditors to charge lower interest rates, which stimulates exporters to switch to cost-reducing capital-intensive technologies. A reduction in international trade costs stimulates exporting firms to switch to more efficient capital-intensive technologies, while non-exporters stick to less capital-intensive ones. This within-industry change in the composition of technologies reinforces the productivity advantage of exporters and contributes further to industry-wide productivity improvement. The results of model simulations highlight that 5--10% of total welfare and productivity gains of trade liberalization can result from the adoption of new technologies by existing firms in the industry, thus amplifying the effect of resource reallocation arising from firms’ entry and exit.