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Comparative advantage, multi-product firms and trade liberalisation : An empirical test

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  • Catherine Fuss

    ()
    (National Bank of Belgium, Research Department)

  • Linke Zhu

    ()
    (Katholieke Universiteit Leuven, LICOS)

Abstract

This paper investigates how economies of scope in multi-product firms interact with comparative advantage in determining the effect of trade liberalisation on resource reallocation, using Belgian manufacturing firm- and firm-product-level data over the period 1997-2007. We first provide evidence on industry integration induced by multi-product firms producing simultaneously in multiple industries and on the extent to which industry integration occurs between industries that have different degrees of comparative advantage. We then examine the impact of opening up trade with low-wage countries on both inter- and intra-industry resource reallocation, taking into account heterogeneity in the integration rate across sectors and industries. Our results indicate that, within more closely integrated sectors, trade liberalisation with low-wage countries leads to less reallocation from low-skill-intensity (comparative-disadvantage) industries to high-skill-intensity (comparative-advantage) industries, both in terms of employment and output. We also find that more integrated industries experience less skill upgrading after trade liberalisation with low-wage countries. Furthermore, we find that within sectors with a low integration rate, trade liberalisation with low-wage countries induces relatively more aggregate TFP and average firm output growth in comparative-advantage industries than in comparative-disadvantage industries, in line with the prediction of Bernard, Redding and Schott (2007), while the opposite is true in highly integrated sectors. Decomposition of the industry-level aggregate TFP changes reveals that the result is mainly driven by reallocation between incumbent firms within industries. Overall, the results are highly consistent with the predictions of the Song and Zhu (2010) model.

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Bibliographic Info

Paper provided by National Bank of Belgium in its series Working Paper Research with number 219.

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Length: 65 pages
Date of creation: Jan 2012
Date of revision:
Handle: RePEc:nbb:reswpp:201201-219

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Keywords: trade liberalisation; industry integration; comparative advantage; firm heterogeneity; microeconomic panel data; Total Factor Productivity;

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  1. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
  2. Bernard, Andrew & Redding, Stephen J & Schott, Peter, 2004. "Comparative Advantage and Heterogenous Firms," CEPR Discussion Papers 4622, C.E.P.R. Discussion Papers.
  3. Nicholas Bloom & Mirko Draca & John Van Reenen, 2011. "Trade Induced Technical Change? The Impact of Chinese Imports on Innovation, IT and Productivity," CEP Discussion Papers dp1000, Centre for Economic Performance, LSE.
  4. Andrew B. Bernard & Stephen Redding & Peter K. Schott, 2006. "Multi-Product Firms and Trade Liberalization," CEP Discussion Papers dp0769, Centre for Economic Performance, LSE.
  5. James Levinsohn & Amil Petrin, 2003. "Estimating Production Functions Using Inputs to Control for Unobservables," Review of Economic Studies, Wiley Blackwell, vol. 70(2), pages 317-341, 04.
  6. M. Eslava, J. Haltwanger, A. Kugler, M. Kugler, 2008. "Factor Adjustments After Deregulation: Panel Evidence from Colombian Plants," Working Papers eg0059, Wilfrid Laurier University, Department of Economics, revised 2008.
  7. Thierry Mayer & Marc J. Melitz & Gianmarco I. P. Ottaviano, 2012. "Market Size, Competition, and the Product Mix of Exporters," CEP Discussion Papers dp1146, Centre for Economic Performance, LSE.
  8. Bernard, Andrew B. & Jensen, J. Bradford & Schott, Peter K., 2006. "Trade costs, firms and productivity," Journal of Monetary Economics, Elsevier, vol. 53(5), pages 917-937, July.
  9. Andrew B. Bernard & Ilke Van Beveren & Hylke Vandenbussche, 2010. "Multi-product exporters, carry-along trade and the margins of trade," Working Paper Research 203, National Bank of Belgium.
  10. John Haltiwanger & C J Krizan & Lucia Foster, 1998. "Aggregate Productivity Growth: Lessons From Microeconomic Evidence," Working Papers 98-12, Center for Economic Studies, U.S. Census Bureau.
  11. Eckel, Carsten & Neary, J Peter, 2006. "Multi-Product Firms and Flexible Manufacturing in the Global Economy," CEPR Discussion Papers 5941, C.E.P.R. Discussion Papers.
  12. Fernandes, Ana M., 2003. "Trade policy, trade volumes, and plant-level productivity in Colombian manufacturing industries," Policy Research Working Paper Series 3064, The World Bank.
  13. Andrew B. Bernard & Stephen J. Redding & Peter K. Schott, 2010. "Multiple-Product Firms and Product Switching," American Economic Review, American Economic Association, vol. 100(1), pages 70-97, March.
  14. Jan De Loecker, 2007. "Product Differentiation, Multi-product Firms and Estimating the Impact of Trade Liberalization on Productivity," NBER Working Papers 13155, National Bureau of Economic Research, Inc.
  15. C. A. Hidalgo & B. Klinger & A. -L. Barabasi & R. Hausmann, 2007. "The Product Space Conditions the Development of Nations," Papers 0708.2090, arXiv.org.
  16. Berman, Eli & Bound, John & Griliches, Zvi, 1994. "Changes in the Demand for Skilled Labor within U.S. Manufacturing: Evidence from the Annual Survey of Manufactures," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 367-97, May.
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