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Trade Liberalization and Investment: Firm-level Evidence from Mexico

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  • Ivan T. Kandilov
  • Asli Leblebicioglu

Abstract

Plant-level panel data from Mexico's Annual Industrial Survey is employed to evaluate the impact of reductions in tariffs and import license coverage on final goods, as well as intermediates, on firms'investment decisions. Using data from 1984 to 1990, a period during which a large scale trade liberalization occurred, a dynamic investment equation is estimated using the system-GMM estimator developed by Arellano and Bover (1995) and Blundell and Bond (1998). Consistent with theory, the empirical analyses show that a reduction in import protection on final goods leads to lower plant-level investment, whereas reductions in tariffs and import license coverage on intermediate inputs result in higher investment. Also, firms with larger import costs experience a larger increase in investment following a reduction in import protection. On the other hand, higher markup firms lower investment more aggressively following reductions in tariffs and import license coverage on final goods. Copyright 2012, Oxford University Press.

Suggested Citation

  • Ivan T. Kandilov & Asli Leblebicioglu, 2012. "Trade Liberalization and Investment: Firm-level Evidence from Mexico," World Bank Economic Review, World Bank Group, vol. 26(2), pages 320-349.
  • Handle: RePEc:oup:wbecrv:v:26:y:2012:i:2:p:320-349
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    File URL: http://hdl.handle.net/10.1093/wber/lhr048
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    Cited by:

    1. Maria Bas & Ivan Ledezma, 2015. "Trade Liberalization and Heterogeneous Technology Investments," Review of International Economics, Wiley Blackwell, vol. 23(4), pages 738-781, September.
    2. Mourad Zmami & Ousama Ben-Salha, 2015. "The adjustment of plant-level investment to exchange rate fluctuations in Tunisia: do the size and the ownership structure matter?," Economics Bulletin, AccessEcon, vol. 35(4), pages 2487-2505.
    3. Benjamin H. Liebman & Kara M. Reynolds, 2015. "Trade Liberalisation and Capital Spending by US Manufacturers," The World Economy, Wiley Blackwell, vol. 38(11), pages 1763-1780, November.
    4. repec:tou:journl:v:45:y:2017:p:79-97 is not listed on IDEAS

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