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Trade Reforms and Market Selection: Evidence from Manufacturing Plants in Colombia

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Author Info
Marcela Eslava
John C. Haltiwanger
Adriana D. Kugler
Maurice Kugler

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Abstract

We use plant output and input prices to decompose the profit margin into four parts: productivity, demand shocks, mark-ups and input costs. We find that each of these market fundamentals are important in explaining plant exit. We then use variation across sectors in tariff changes after the Colombian trade reform to assess whether the impact of market fundamentals on plant exit changed with increased international competition. We find that greater international competition magnifies the impact of productivity, and other market fundamentals, on plant exit. A dynamic simulation that compares the distribution of productivity with and without the trade reform shows that improvements in market selection from trade reform help to weed out the least productive plants and increase average productivity. In addition, we find that trade liberalization increases productivity of incumbent plants and improves the allocation of activity within industries.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14935.

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Date of creation: Apr 2009
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Handle: RePEc:nbr:nberwo:14935

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Find related papers by JEL classification:
F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
O47 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Measurement of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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