Manufacturing Restructuring and the Role of Real Exchange Rate Shocks

Using a new and extensive micro data set we investigate the impact of a change in international competitive pressure on productivity and restructuring. Unlike previous studies we are able to account for the heterogeneity across firms in their exposure to foreign competition. We focus on a situation akin to a natural experiment, and examine the impact of a sharp real appreciation of the Norwegian Krone in the early 2000s on Norwegian manufacturing firms which differ substantially in their trade orientation. A change in the real exchange rate (RER) affects a firm through three different channels: (i) firm's export sales, (ii) firm's purchases of imported inputs, and (iii) import competition faced in the domestic market. Unlike previous studies, we are able to examine all three channels. Several strong conclusions emerge from the analysis. While both net exporters and import-competing firms were exposed to increased competition due to the real appreciation, only the former reacted by increasing productivity. The RER shock was associated with substantial within-firm productivity gains for net exporters; gains that seem to have come about partly through technological improvements. The productivity gains also appear to have been associated with employment cuts. Somewhat surprisingly, firm exits did not contribute significantly to aggregate productivity gains.