Gradual Trade Liberalization and Firm Performance in Ethiopia
We use firm-level data for the Ethiopian manufacturing sector matched with commodity-level data on tariffs to examine the effect of trade liberalization on firm performance during the 1997-2005 period.� We find relatively large positive effects of tariff reductions on total factor productivity, a result that is robust to treating tariffs as endogenous, and to various generalizations of the baseline model.� This effect is primarily driven by mechanisms operating at high tariff levels, suggesting that excessive tariff levels may be particularly distortionary.� We find some evidence that the reduction of tariffs has resulted in smaller and more capital-intensive domestic firms.� We note that these effects are consistent with the hypothesis that the trade liberalization has increased competition in the domestic market.� We find no significant effect of the trade liberalization on entry or exit rates.
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