IDEAS home Printed from
MyIDEAS: Login to save this paper or follow this series

The better you are the stronger it makes you : evidence on the asymmetric impact of liberalization

  • Iacovone, Leonardo

This paper studies how liberalization affects productivity growth using micro-level plant data. While previous studies have already shown the existence of a positive relationship between competition and economic performance, the novelty of this paper is that it analyzes not only the average impact of liberalization, but also goes"beyond the average"and shows how the liberalization can affect dissimilar plants in a different way. The author first develops a model which predicts that, while the impact of liberalization on productivity growth is positive"on average", more advanced firms tend to benefit more. In fact, liberalization generates two competing effects: on one side it spurs more innovative efforts because of the increased entry threat by foreign competitors, on the other side, enhanced competition curtails expected profits and reduces the funds available to finance innovative activities. The pro-competitive effect is weaker for less advanced firms as for them it is harder to catch-up with the"technology frontier". These predictions are then tested focusing on Mexican plants during the NAFTA liberalization. The results show that a 1 percent reduction in tariffs spurred productivity growth between 4 and 8 percent on average. However, for backward firms this effect is much weaker if not close to zero, otherwise for more advanced ones this effect is stronger with productivity growing between 11 and 13 percent. Consistent with the theoretical model the results are stronger in those sectors where the scope for innovative activities is more pronounced. These results are particularly important for policy makers because they suggest that while increasing competition may be good in spurring average productivity, it is also true that this effect does not hold for all type of firms, in particular more backward firms may need some complementary support policy to upgrade their capacities and keep up with the more competitive environment.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 4930.

in new window

Date of creation: 01 May 2009
Date of revision:
Handle: RePEc:wbk:wbrwps:4930
Contact details of provider: Postal: 1818 H Street, N.W., Washington, DC 20433
Phone: (202) 477-1234
Web page:

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Paula Bustos, 2011. "Trade Liberalization, Exports, and Technology Upgrading: Evidence on the Impact of MERCOSUR on Argentinian Firms," American Economic Review, American Economic Association, vol. 101(1), pages 304-40, February.
  2. Rajan, Raghuram G & Zingales, Luigi, 1998. "Financial Dependence and Growth," American Economic Review, American Economic Association, vol. 88(3), pages 559-86, June.
  3. Carsten Kowalczyk & Donald Davis, 1996. "Tariff Phase-Outs: Theory and Evidence from GATT and NAFTA," NBER Working Papers 5421, National Bureau of Economic Research, Inc.
  4. Martin, John P & Page, John M, Jr, 1983. "The Impact of Subsidies on X-Efficiency in LDC Industry: Theory and an Empirical Test," The Review of Economics and Statistics, MIT Press, vol. 65(4), pages 608-17, November.
  5. James R. Tybout, 2001. "Plant- and Firm-Level Evidence on "New" Trade Theories," NBER Working Papers 8418, National Bureau of Economic Research, Inc.
  6. Pavcnik, Nina, 2002. "Trade Liberalization, Exit, and Productivity Improvement: Evidence from Chilean Plants," Review of Economic Studies, Wiley Blackwell, vol. 69(1), pages 245-76, January.
  7. Juan Carlos Hallak & James Levinsohn, 2004. "Fooling Ourselves: Evaluating the Globalization and Growth Debate," Working Papers 509, Research Seminar in International Economics, University of Michigan.
  8. Elhanan Helpman & Marc J. Melitz & Stephen R. Yeaple, 2004. "Export Versus FDI with Heterogeneous Firms," American Economic Review, American Economic Association, vol. 94(1), pages 300-316, March.
  9. Daniel Trefler, 2004. "The Long and Short of the Canada-U. S. Free Trade Agreement," American Economic Review, American Economic Association, vol. 94(4), pages 870-895, September.
  10. Aaron Tornell & Gerardo Esquivel, 1995. "The Political Economy of Mexico's Entry to NAFTA," NBER Working Papers 5322, National Bureau of Economic Research, Inc.
  11. Head, Keith & Ries, John, 1999. "Rationalization effects of tariff reductions," Journal of International Economics, Elsevier, vol. 47(2), pages 295-320, April.
  12. Fernandes, Ana M., 2003. "Trade policy, trade volumes, and plant-level productivity in Colombian manufacturing industries," Policy Research Working Paper Series 3064, The World Bank.
  13. Goldberg, Pinelopi Koujianou & Pavcnik, Nina, 2005. "Trade, wages, and the political economy of trade protection: evidence from the Colombian trade reforms," Journal of International Economics, Elsevier, vol. 66(1), pages 75-105, May.
  14. Philippe Aghion & Nicholas Bloom & Richard Blundell & Rachel Griffith & Peter Howitt, 2002. "Competition and innovation: an inverted U relationship," IFS Working Papers W02/04, Institute for Fiscal Studies.
  15. Richard Disney & Jonathan Haskel & Ylva Heden, 2003. "Restructuring and productivity growth in uk manufacturing," Economic Journal, Royal Economic Society, vol. 113(489), pages 666-694, 07.
  16. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
  17. Petia Topalova & Amit Khandelwal, 2011. "Trade Liberalization and Firm Productivity: The Case of India," The Review of Economics and Statistics, MIT Press, vol. 93(3), pages 995-1009, August.
  18. Andrew B. Bernard & Stephen Redding & Peter K. Schott, 2004. "Comparative advantage and heterogeneous firms," LSE Research Online Documents on Economics 3700, London School of Economics and Political Science, LSE Library.
  19. repec:oup:restud:v:69:y:2002:i:1:p:245-76 is not listed on IDEAS
  20. Tybout, James, 1998. "Manufacuring firms in developing countries - how well do they do, and why?," Policy Research Working Paper Series 1965, The World Bank.
  21. repec:oup:qjecon:v:123:y:2008:i:2:p:489-530 is not listed on IDEAS
  22. Francisco Rodriguez & Dani Rodrik, 1999. "Trade Policy and Economic Growth: A Skeptic's Guide to Cross-National Evidence," NBER Working Papers 7081, National Bureau of Economic Research, Inc.
  23. Chad Syverson, 2003. "Product Substitutability and Productivity Dispersion," NBER Working Papers 10049, National Bureau of Economic Research, Inc.
  24. Zilibotti, Fabrizio & Redding, Stephen & Burgess, Robin & Aghion, Philippe, 2005. "Entry Liberalization and Inequality in Industrial Performance," Scholarly Articles 4481508, Harvard University Department of Economics.
  25. Stephen Nickell, 1993. "Competition and Corporate Performance," CEP Discussion Papers dp0182, Centre for Economic Performance, LSE.
  26. Rachel Griffith & Stephen Redding & Helen Simpson, 2003. "Productivity convergence and foreign ownership at the establishment level," LSE Research Online Documents on Economics 3666, London School of Economics and Political Science, LSE Library.
  27. Mary Amiti & Jozef Konings, 2007. "Trade Liberalization, Intermediate Inputs, and Productivity: Evidence from Indonesia," American Economic Review, American Economic Association, vol. 97(5), pages 1611-1638, December.
  28. De Hoyos, Rafael E. & Iacovone, Leonardo, 2013. "Economic Performance under NAFTA: A Firm-Level Analysis of the Trade-productivity Linkages," World Development, Elsevier, vol. 44(C), pages 180-193.
  29. Philippe Aghion & Evguenia Bessonova, 2006. "On Entry and Growth: Theory and Evidence," Revue de l'OFCE, Presses de Sciences-Po, vol. 97(5), pages 259-278.
  30. Tybout, James R. & Westbrook, M. Daniel, 1995. "Trade liberalization and the dimensions of efficiency change in Mexican manufacturing industries," Journal of International Economics, Elsevier, vol. 39(1-2), pages 53-78, August.
  32. Alla Lileeva & Daniel Trefler, 2007. "Improved Access to Foreign Markets Raises Plant-Level Productivity ... for Some Plants," NBER Working Papers 13297, National Bureau of Economic Research, Inc.
  33. James E. Rauch, 1996. "Networks versus Markets in International Trade," NBER Working Papers 5617, National Bureau of Economic Research, Inc.
  34. Arellano, Manuel, 2003. "Panel Data Econometrics," OUP Catalogue, Oxford University Press, number 9780199245291, July.
  35. Gordon H. Hanson & Ann Harrison, 1999. "Trade Liberalization and Wage Inequality in Mexico," ILR Review, Cornell University, ILR School, vol. 52(2), pages 271-288, January.
  36. Martin, John P, 1978. "X-inefficiency, Managerial Effort and Protection," Economica, London School of Economics and Political Science, vol. 45(179), pages 273-86, August.
  37. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
  38. Klara Sabirianova & Jan Svejnar & Katherine Terrell, 2005. "Distance to the Efficiency Frontier and Foreign Direct Investment Spillovers," Journal of the European Economic Association, MIT Press, vol. 3(2-3), pages 576-586, 04/05.
  39. Dani Rodrik, 1988. "Imperfect Competition, Scale Economies, and Trade Policy in Developing Countries," NBER Chapters, in: Trade Policy Issues and Empirical Analysis, pages 109-144 National Bureau of Economic Research, Inc.
  40. Haskel, Jonathan, 1991. "Imperfect Competition, Work Practices and Productivity Growth," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 53(3), pages 265-79, August.
  41. repec:oup:qjecon:v:125:y:2010:i:3:p:1051-1099 is not listed on IDEAS
  42. Eric J. Bartelsman & Mark Doms, 2000. "Understanding productivity: lessons from longitudinal microdata," Finance and Economics Discussion Series 2000-19, Board of Governors of the Federal Reserve System (U.S.).
  43. Adriana Schor, 2004. "Heterogeneous Productivity Response to Tariff Reduction: Evidence from Brazilian Manufacturing Firms," NBER Working Papers 10544, National Bureau of Economic Research, Inc.
  44. Geroski, P A, 1990. "Innovation, Technological Opportunity, and Market Structure," Oxford Economic Papers, Oxford University Press, vol. 42(3), pages 586-602, July.
  45. Yeaple, Stephen Ross, 2005. "A simple model of firm heterogeneity, international trade, and wages," Journal of International Economics, Elsevier, vol. 65(1), pages 1-20, January.
  46. Nelson, Richard R, 1981. "Research on Productivity Growth and Productivity Differences: Dead Ends and New Departures," Journal of Economic Literature, American Economic Association, vol. 19(3), pages 1029-64, September.
  47. Cameron,A. Colin & Trivedi,Pravin K., 2005. "Microeconometrics," Cambridge Books, Cambridge University Press, number 9780521848053.
  48. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-50, September.
  49. Leibenstein, Harvey, 1978. "On the Basic Proposition of X-Efficiency Theory," American Economic Review, American Economic Association, vol. 68(2), pages 328-32, May.
  50. Schor, Adriana, 2004. "Heterogeneous productivity response to tariff reduction. Evidence from Brazilian manufacturing firms," Journal of Development Economics, Elsevier, vol. 75(2), pages 373-396, December.
  51. Aw, Bee Yan & Chen, Xiaomin & Roberts, Mark J., 2001. "Firm-level evidence on productivity differentials and turnover in Taiwanese manufacturing," Journal of Development Economics, Elsevier, vol. 66(1), pages 51-86, October.
  52. Revenga, Ana, 1997. "Employment and Wage Effects of Trade Liberalization: The Case of Mexican Manufacturing," Journal of Labor Economics, University of Chicago Press, vol. 15(3), pages S20-43, July.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:4930. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.