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Trade, Productivity and Profits: On Profit levels and Profit margins

Listed author(s):
  • Saara Tamminen
  • den Berg Marcel van
  • Marrewijk Charles van

Do firms engaging in international trade have higher or lower profit margins? It is well-established that more productive firms engage in trading activities and as a result have higher profit levels. We use two theoretical models (the Melitz model and the Egger-Kreickemeier model) to clarify the relationship between productivity, trade activity, and profit margins and derive three hypotheses: (I) profit margins rise as productivity rises for domestic firms, (II) profit margins rise as productivity rises for trading firms, and (III) profit margins are not higher for trading firms than for domestic firms. We test these hypotheses using detailed micro-data for Finland (2005-2010) and the Netherlands (2002-2010). We find strong support for hypothesis I (in favour of the Melitz model), hypothesis II (in favour of both models), and hypothesis III (in favour of the Egger-Kreickemeier model). A propensity score matching analysis provides further support for hypothesis III.

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Paper provided by Government Institute for Economic Research Finland (VATT) in its series Working Papers with number 80.

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Date of creation: 28 Sep 2016
Handle: RePEc:fer:wpaper:80
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  1. Giulio Bottazzi & Marco Grazzi & Angelo Secchi & Federico Tamagni, 2011. "Financial and economic determinants of firm default," Journal of Evolutionary Economics, Springer, vol. 21(3), pages 373-406, August.
  2. Sofronis K. Clerides & Saul Lach & James R. Tybout, 1998. "Is Learning by Exporting Important? Micro-Dynamic Evidence from Colombia, Mexico, and Morocco," The Quarterly Journal of Economics, Oxford University Press, vol. 113(3), pages 903-947.
  3. Mayer Thierry & Ottaviano Gianmarco I.P., 2008. "The Happy Few: New Facts on the Internationalization of European Firms Based on Firm-level Evidence," L'industria, Società editrice il Mulino, issue 2, pages 221-244.
  4. Brakman,Steven & Garretsen,Harry & van Marrewijk,Charles, 2009. "The New Introduction to Geographical Economics," Cambridge Books, Cambridge University Press, number 9780521698030, August.
  5. Marco Grazzi, 2012. "Export and Firm Performance: Evidence on Productivity and Profitability of Italian Companies," Journal of Industry, Competition and Trade, Springer, vol. 12(4), pages 413-444, December.
  6. David Greenaway & Richard Kneller, 2007. "Industry Differences in the Effect of Export Market Entry: Learning by Exporting?," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 143(3), pages 416-432, October.
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