Essays On International Trade Productivity And Firm Heterogeneity

The thesis is organized as follows. Chapter 2 contains a survey of the three most in‡fluential models on fi…rm heterogeneity and of the most important empirical work on firrm heterogeneity. The chapter starts with a brief review of the homogeneous productivity imperfect competition literature. Chapter 2 …finishes with a comparison of the three most in‡fluential models of fi…rm heterogeneity and the oligopoly model put forward in the thesis. Chapter 3 addresses exporting uncertainty under heterogeneous popularity. Chapter 4 contains the chapter on …firm heterogeneity under oligopoly. Chapter 5 constitutes the models on …firm heterogeneity and endogenous quality. Chapter 6 points out the within-sector specialization model. Chapter 7 addresses the effect of importer characteristics on unit values and the role of markups and quality to explain this effect. Chapter 8 concludes.

In this dissertation, I contribute to the literature on international economics by drawing attention to the impact of trade flows and structural reforms on productivity growth in the manufacturing sector in Europe and India. ln the first chapter co-authored, with Antoine Berthou, Jong-Chung Chung and Kalina Manova, we demonstrate that growth in exports and imports boosts labor productivity, but only export demand reallocates activity toward more productive firms in presence of price distortions. Moreover, market and institutional frictions dampen the ability of economies to react and gain from trade shocks. ln the second chapter, I show that the increase in Chinese imports of intermediate inputs is a significant driver of aggregate TFP growth in France as it increases efficiency in sharing market shares between firms. Allowing more firms to access intermediate goods at the best price-quality ratio stimulates aggregate productivity growth. ln the third chapter, co-written with Adil Mohommad and Piyapom Sodsriwiboon, our finding suggests that removing structural rigidities in the labor market and improving credit allocation would reduce distortions and contribute to productivity gains and long term growth in India.

Recent empirical firm level studies reveal the structural heterogeneity of firms in process and product innovation, as well as the central role of product quality in determining world trade patterns and intensities. This calls for a better understanding of the link between firm heterogeneity and the innovation and export decisions of firms which are at the base of productivity growth and, hence, economic growth and development. My dissertation contributes to this debate focusing on the supply side. I propose a novel way to model the production technology of firms by introducing two attributes of firm heterogeneity: cost efficiency and product quality. The goal of the first thesis chapter is to study the effects of process and product innovation on firm dynamics, productivity and endogenous long run growth. In the second chapter an open economy framework with trade between symmetric countries is analyzed. Here the focus is on quantifying the impact of trade as well as trade liberalization on firm innovation dynamics and productivity- and aggregate growth. The third chapter abstracts from endogenous growth and examines the role of the two attributes of firm heterogeneity in shaping the trade patterns and intensities within and across developed and developing countries.

This thesis consists of three essays in international trade. The first chapter explores the consequences of firm-level resource misallocation on the gains from trade liberalization. While the standard trade models explain observed firm heterogeneity with variance in firms' innate productivity, discriminatory policies and political connections may also affect the firm size and generate resource misallocation across firms. In this chapter, I show that the productivity heterogeneity alone cannot adequately explain the observed firm-level patterns in Chinese manufacturing sector. I document that larger firms exhibit lower average revenue productivity, revenue productivity variance is high conditional on firm size, and larger exporters exhibit lower export intensity. Introducing firm-level misallocation can help reconcile these facts and doing so matters for estimating the gains from trade. The misallocation model predicts the size of gains from trade that is 45\% lower than the standard model predicts when both models are calibrated with the same Chinese manufacturing data. The result suggests that accounting for firm level heterogeneity in the dimensions other than productivity is important when estimating the gains from trade. The second chapter, a joint work with Antoine Berthou (Banque de France), Kalina Manova (University College London), and Charlotte Sandoz (IMF), examines the impact of international trade on aggregate welfare and productivity. We show theoretically and numerically that bilateral and unilateral export liberalizations increase aggregate welfare and productivity, while unilateral import liberalization can either raise or reduce them. However, all three trade reforms have ambiguous effects in the presence of resource misallocation across heterogeneous firms. Using unique new data on 14 European countries and 20 manufacturing industries during 1998-2011, we empirically establish that exogenous shocks to both export demand and import competition generate large aggregate productivity gains. We develop a precise mapping between theory and empirics, and provide evidence for the adjustment mechanisms. First, both trade aspects increase average firm productivity, but export expansion also reallocates activity towards more productive firms, while import penetration acts in reverse. Second, both export and import exposure raise the productivity threshold for survival, but the latter is not a summary statistic for aggregate productivity. Finally, efficient institutions, factor and product markets amplify the productivity gains from import competition, but dampen those from export expansion. We conclude that the effects of globalization operate through firm selection and reallocation in the presence of resource misallocation. The third chapter studies the role of production chain on the patterns of international trade. Theory suggests that if producing a final product requires a sequence of production stages, and a mistake occurring at any stage destroys the product, then countries with higher productivity has comparative advantage in later stages of production chain, where the cost of mistake is higher. Despite this prediction, I combine international trade data with country and sector level data to show that more developed countries specialize in earlier stages, once other sources of comparative advantage have been considered. This result suggests that quality control is potentially an important factor in country's specialization along production chains -- when mistakes are imperfectly observed, countries with better ability to observe mistakes would specialize in more upstream sectors.

This dissertation consists of three studies on trade, industrial organization, and environmental economics. The first study investigates endogenous cartel formation with market entry and firm heterogeneity. We show why large firms do not join a cartel in some industries and choose to compete rather than cooperate with a cartel. We illustrate that, under certain conditions, only firms with intermediate productivity benefit from joining a cartel; and low-productive firms cannot compete efficiently for production quota in the cartel and hence choose to stay out. High-productive firms prefer to stay out because building excess capacity in cartel lowers their profits.

This dissertation analyzes the interaction of firm level heterogeneity and selection. This selection can encompass either the survival of firms in the market, or their participation in international trade. In the first part I concentrate on the question of how large the aggregate productivity losses from the misallocation of resources across firms are. If firm exit is endogenous, micro-frictions can induce extensive margin misallocation: inefficient firms continue to survive (Zombies) and efficient firms are forced to exit (Shadows). I develop and estimate a fully specified model with plant-level micro-data to quantify extensive margin misallocation. This method allows me to identify Zombie firms, estimate the efficiency distribution of Shadow firms and calculate aggregate Total Factor Productivity (TFP) gains when Zombies are replaced by Shadows. Estimates for Indonesia show that extensive margin misallocation can increase aggregate TFP losses from micro-distortions by over 40%. Compared to existing estimates aggregate TFP losses from micro-distortions are 50-100% higher. In the second part of the dissertation I trace out the implications of a simplified version of the framework I developed in the first part to questions of international trade. The cross-country comparisions in measured micro-distortions suggest that differences in firm heterogeneity could be potentially important to explain aggregate TFP and therefore also trade patterns. I consequently develop a tractable multi-country general equilibrium model of such differences in firm level heterogeneity across countries. I show how the model naturally links measured trade frictions to national firm-efficiency distributions and endogenously generates asymmetries in trade flows in the absence of asymmetric trade frictions. The model is able to generate key stylized facts, specifically the absence of a strong negative relationsship of firm-size dispersions and internal trade shares as predicted by the standard heterogeneous firm trade model with identical efficiency dispersions across countries.

The objective of this dissertation is to theoretically and empirically examine the role of firm heterogeneity in terms of productivity and skill-intensity in the agglomeration process and the effect of agglomeration on regional economic development. In the first essay, I analyze the effect of trade liberalization on agglomeration of high- and low-productivity firms and the consequences for regional economic development. By extending a new-economic-geography model, I find that competition, domestic and international, disperses low-productivity firms to less-developed regions. Trading with advanced countries also appears to bring about dispersion of economic activity. However, attempts by less-developed regions to provide monetary incentives are less likely to attract high-productivity firms. In the second essay, I empirically test the hypothesis that high-productivity (exporting) plants in Chile self-select to locate in large markets. Plants' raw productivity, i.e., productivity independent of agglomeration economies, is computed to obtain regional productivity-distribution measures. I find that high-productivity (exporting) plants indeed locate in a region where other plants in the same industry agglomerate, industrial structure is diversified and market size is large. Finally, plants' self-selection outweighs the contribution of agglomeration economies in increasing a region's productivity. In the third essay, I identify the mechanism by which human-capital spillovers occur at the plant-level and examine the relationship between spillovers and agglomeration of high skill-intensive plants in Chile. I employ plant-level production functions incorporating the absorptive capacity hypothesis, i.e., high skill-intensive plants benefit more from human-capital spillovers than others. Empirically, in 5 out of 8 manufacturing industries, the benefit from spillovers is larger in high skill-intensive plants. Plant entry and exit are also affected by spillovers resulting in regional skill disparities. The results of the three essays reveal locational preferences of various types of firms. Policy options for economic development through increases in regional productivity include specializing in targeted industry, diversifying regional industrial structure, enlarging the market size and workforce education. The results of this dissertation help local governments to evaluate of the benefits from each policy option, which when compared with their knowledge of costs, aid in the selection of an effective policy to improve regional well-being.