The NAFTA tide: Lifting the larger and better boats

We use panel data on Mexican manufacturing plants to study the connection between plants' responses to changes in the economic environment and their contributions to aggregate total factor productivity growth, in the period following the implementation of the North American Trade Agreement. An overwhelming share of industry-level aggregate total factor productivity growth is accounted for by a small number of plants, which were larger and more productive before the implementation of NAFTA and expanded and became more productive following the implementation of NAFTA. Plants that exported before NAFTA and exported continuously through to 2000, and new exporters, are more likely to be among the top-performing plants. The performance of plants with similar exporting experience displays, however, remarkable heterogeneity: a significant number of plants that never export have strong output and productivity performance, while many exporters display poor performance. Spending on research and development, and three variables describing plants' level of integration in the global markets - foreign direct investment, use of imported intermediary inputs, and investment in foreign capital goods - are positively correlated with output and productivity performance.