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Barriers to Firm Growth in Open Economies

  • Facundo Piguillem

    (EIEF)

  • Loris Rubini

    (UC3M)

The international trade literature finds strong links between firm growth and export decisions. In spite of this, the literature analyzing cross-country differences in firm growth commonly abstracts from trade. We develop a tractable, dynamic model to understand the consequences of this abstraction. We find that the closed economy (i) under-estimates domestic (firm) growth barriers, potentially modifying the rankings across countries; and (ii) over-predicts the effects of counterfactuals. To asses the quantitative relevance of these findings, we calibrate the model to a set of European countries. The model successfully captures differences in value added per worker, accounting for between 54 and 87% of the differences across countries. We find that a closed economy alters the ranking of countries according to the size of these barriers and over-predicts the effects of counterfactuals on welfare by between 31 and 64% relative to the open economy. Thus, trade is essential for measuring barriers to firm growth and their counterfactuals in open economies.

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Paper provided by Einaudi Institute for Economics and Finance (EIEF) in its series EIEF Working Papers Series with number 1304.

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Length: 53 pages
Date of creation: 2013
Date of revision: Mar 2013
Handle: RePEc:eie:wpaper:1304
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  1. Johannes Van Biesebroeck, 2003. "Exporting Raises Productivity in Sub-Saharan African Manufacturing Plants," NBER Working Papers 10020, National Bureau of Economic Research, Inc.
  2. Jan De Loecker, 2004. "Do Exports Generate Higher Productivity? Evidence from Slovenia," LICOS Discussion Papers 15104, LICOS - Centre for Institutions and Economic Performance, KU Leuven.
  3. Impullitti, Giammario & Irarrazabal, Alfonso A. & Opromolla, Luca David, 2013. "A theory of entry into and exit from export markets," Journal of International Economics, Elsevier, vol. 90(1), pages 75-90.
  4. Bee Yan Aw & Mark J. Roberts & Daniel Yi Xu, 2009. "R&D Investment, Exporting, and Productivity Dynamics," NBER Working Papers 14670, National Bureau of Economic Research, Inc.
  5. James Tybout, 1998. "Manufacturing Firms In Developing Countries: How Well Do They Do, And Why?," Development and Comp Systems 9805004, EconWPA.
  6. Rubini, Loris, 2009. "Innovation and the Elasticity of Trade Volumes to Tariff Reductions," MPRA Paper 21484, University Library of Munich, Germany.
  7. Maria Guadalupe & Olga Kuzmina & Catherine Thomas, 2010. "Innovation and Foreign Ownership," NBER Working Papers 16573, National Bureau of Economic Research, Inc.
  8. Michael E. Waugh, 2010. "International Trade and Income Differences," American Economic Review, American Economic Association, vol. 100(5), pages 2093-2124, December.
  9. Xavier Gabaix, 2011. "The Granular Origins of Aggregate Fluctuations," Econometrica, Econometric Society, vol. 79(3), pages 733-772, 05.
  10. Loris Rubini & Klaus Desmet & Facundo Piguillem & Aranzazu Crespo, . "Breaking down the barriers to firmgrowth in Europe The fourth EFIGE policy report," Blueprints, Bruegel, number 744.
  11. Erzo G. J. Luttmer, 2007. "Selection, Growth, and the Size Distribution of Firms," The Quarterly Journal of Economics, MIT Press, vol. 122(3), pages 1103-1144, 08.
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