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Saturday, November 18, 2006

NBER Reporter: Firms in International Trade

What are the characteristics of firms involved in international trade? Are these firms more productive? Do they pay higher wages? What are the effects of trade liberalization on employment, labor skill levels, and survival?

Firms in International Trade, by Andrew B. Bernard, NBER Reporter, Fall 2006: For most of its lengthy history the field of international trade largely ignored the role of the firm... Traditional trade theory explained the flow of goods between countries in terms of comparative advantage... Even the research focusing on differentiated varieties and increasing returns to scale that followed Helpman and Krugman continued to retain the characterization of the representative firm.¹ However, the assumption of a representative firm, while greatly enhancing the tractability of general equilibrium analysis, is emphatically rejected in the data. My research ... has been an attempt to ... understand the decisions of heterogeneous firms in shaping international trade and their effects on productivity growth and welfare.

Firm Heterogeneity and Trade My early work with J. Bradford Jensen was motivated by a simple question: what do we know about firms that trade? The answer at the time was "very little" and our initial efforts focused on ... describing the world of exporting firms. Our first study compared exporters and non-exporters for the entire U.S. manufacturing sector and established a set of facts about exporting plants and firms.² Two major results stand out. First, only a small fraction of firms are exporters at any given time. Even in sectors where the United States is thought to have comparative advantage, ... a majority of firms produce only for the domestic market. Similarly, some firms are exporting even in net import sectors such as Textiles and Apparel.

Second, exporters are substantially and significantly different than non-exporters, even in the same industry and region. Exporters are dramatically larger, more productive, pay higher wages, use more skilled workers, and are more technology- and capital-intensive than their non-exporting counterparts. ...[S]ubsequent research by numerous authors has confirmed th[is] to be robust across a wide range of industries, regions, time periods and countries at varied levels of economic development.³

Exporting and Productivity The biggest question raised by this early research was ... whether exporting leads to higher plant productivity. Research done with J. Bradford Jensen established that "potential" exporters have better characteristics years before they enter a foreign market, including higher productivity, higher wages, and larger size. However, the most important finding was that exporters do not have higher productivity growth even though they have higher levels of productivity..., and over some horizons actual significantly underperform in terms of productivity growth.

As a complementary question, we asked whether higher productivity increases the probability of a plant becoming an exporter. ... The strong conclusion from this empirical work is that high productivity firms are able to pay the sunk costs of entering foreign markets but that, once in, they do not receive an extra productivity kick.

However, ... Work on the determinants of the U.S. export boom cautioned that improved U.S. productivity still played a minor role relative to exchange rates and foreign income growth in the dramatic expansion of exports in the late 1980s and early 1990s.

While firm-level productivity is not improved by exporting, exporting does benefit the firm in other ways. First, plant failure is dramatically less likely... Ownership by a multinational, however, substantially increases the conditional probability that a plant will close. This relationship between multinationality and plant closure holds in other countries as well.

The second major benefit of exporting for the firm is faster growth, both for output and employment. The faster output growth at exporters, combined with their higher initial productivity levels, leads to relatively large effects on aggregate productivity. A substantial fraction of overall manufacturing productivity growth is attributable to faster growth of high-productivity exporters.

Firms and Trade -- Theory ...

Firm Responses to Trade Liberalization The empirical and theoretical work on firm heterogeneity and trade naturally leads to the question of how firms respond to trade liberalization and increased foreign competition. J. Bradford Jensen, Peter K. Schott, and I test for the effects of competition from low-wage countries such as China on plant employment and plant survival.¹³ High levels of import competition from low wage countries are bad for plant growth and survival but are especially problematic for low-capital, low-skill plants in any industry. In addition, we find that plants facing high levels of competition from low-wage countries are more likely to change their output mix towards products made with more capital and more skilled labor. This discovery of product switching in response to foreign competition has led to a new series of papers documenting the extraordinary amount of ongoing product switching in the U.S. economy. ...

Trade and Wages My work on the interaction of firms and international trade has naturally led to a series of related papers on the role of trade in contributing to wage inequality in the United States. Starting from the observation that exporters pay higher wages than non-exporters, J. Bradford Jensen and I asked whether increased exports contributed to the rise in wage inequality in the manufacturing sector in the 1980s. The results showed that increased wage inequality was largely associated with changes in employment across plants in the same industry and that rising demand for exports played an important role in this employment shift. ...

Firms and Products ...

Next Steps ...

____________________________

References

1. E. Helpman and P. R. Krugman, Market Structure and Foreign Trade: Increasing Returns, Imperfect Competition and the International Economy, Cambridge, MA: MIT Press, 1985.

2. A. B. Bernard and J. B. Jensen, "Exporters, Jobs, and Wages in U.S. Manufacturing: 1976-87", Brookings Papers on Economic Activity: Microeconomics, 1995, pp. 67-112.

3. A. B. Bernard and J. Wagner, "Exports and Success in German Manufacturing," Weltwirtschaftliches Archiv, 1997, Vol. 133, No.1, pp. 134-57.

4. A. B. Bernard and J. B. Jensen, "Exceptional Exporter Performance: Cause, Effect, or Both?" NBER Working Paper No. 6272, November 1997, and Journal of International Economics, 1999, 47(1), pp. 1-25.

5. A. B. Bernard and J. B. Jensen, "Why Some Firms Export", NBER Working Paper No. 8349, July 2001, and The Review of Economics and Statistics, 2004, Vol. 86, No. 2; and A.B. Bernard and J. Wagner, "Export Entry and Exit by German Firms", NBER Working Paper No. 6538, April 1998, and Weltwirtschaftliches Archiv, 2001, Vol. 137, No.1.

6. A.B. Bernard and J.B. Jensen, "Understanding the U.S. Export Boom", NBER Working Paper No. 6438, March 1998, published as "Entry, Expansion and Intensity in the U.S. Export Boom, 1987-1992", Review of International Economics, 2004, 12(4), pp. 662-75.

7. A. B. Bernard and J. B. Jensen, "Firm Structure, Multinationals, and Manufacturing Plant Deaths", forthcoming in The Review of Economics and Statistics, revision of "The Deaths of Manufacturing Plants", NBER Working Paper No. 9026, July 2002.

8. A. B. Bernard and F. Sjöholm, "Foreign Owners and Plant Survival", NBER Working Paper No. 10039, October 2003.

9. A. B. Bernard and J. B. Jensen, "Exporting and Productivity", NBER Working Paper No. 7135, May 1999, published as "Exporting and Productivity in the USA", Oxford Review of Economic Policy, 2004, Vol. 20, No. 3.

10. A. B. Bernard, J. Eaton, J. B. Jensen, and S. S. Kortum, "Plants and Productivity in International Trade", NBER Working Paper No. 7688, May 2000, and American Economic Review, 2003, 93(4), pp. 1268-90.

11. A. B. Bernard, S. J. Redding, and P. K. Schott, "Comparative Advantage and Heterogeneous Firms", NBER Working Paper No. 10668, August 2004, forthcoming in Review of Economic Studies.

12. M. Melitz, "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity", Econometrica, Vol. 71, November 2003, pp. 1695-725.

13. A. B. Bernard, J. B. Jensen, and P. K. Schott, "Survival of the Best Fit: Exposure to Low Wage Countries and The (Uneven) Growth of U.S. Manufacturing Plants", NBER Working Paper No. 9170, September 2002, and Journal of International Economics, 2006, Vol. 68, pp. 219-37.

14. A. B. Bernard, S. Redding, and P. K. Schott, "Multi-Product Firms and Product Switching", forthcoming as an NBER Working Paper.

15. A. B. Bernard, J. B. Jensen, and P. K. Schott, "Trade Costs, Firms and Productivity", forthcoming in Journal of Monetary Economics, presented at the Carnegie-Rochester Conference on Public Policy, November 18-19, 2005; revision of "Falling Trade Costs, Hetergeneous Firms, and Industry Dynamics", NBER Working Paper No. 9639, April 2003.

16. A. B. Bernard and J. B. Jensen, "Exporters, Skill Upgrading and the Wage Gap," Journal of International Economics, Vol. 42, 1997, pp. 3-31.

17. R. Robertson, "Trade Liberalization and Wage Inequality: Lessons from the Mexican Experience", World Economy, 2000, 23(6): pp. 827-49; and E. Verhoogen, "Trade, Quality Upgrading and Wage Inequality in the Mexican Manufacturing Sector: Theory and Evidence from an Exchange-Rate Shock" Columbia University working paper, 2006.

18. A. B. Bernard, S. J. Redding, P. K. Schott, "Factor Price Equality and the Economies of the United States" CEPR Discussion Paper No. 5111, June 2005 revision of A. B. Bernard, J. B. Jensen, and P. K. Schott, "Factor Price Equality and the Economies of the United States", NBER Working Paper No. 8068, January 2001.

19. A. B. Bernard, S. J. Redding, P. K. Schott, H. Simpson "Factor Price Equalization in the UK?" NBER Working Paper No. 9052, July 2002; A. B. Bernard, S. J. Redding, P. K. Schott, H. Simpson, "Relative Wage Variation and Industry Location", NBER Working Paper No. 9998, September 2003; A. B. Bernard, R. Robertson, and P. K. Schott, "Is Mexico a Lumpy Country?" NBER Working Paper No. 10898, November 2004

20. A. B. Bernard, J. B. Jensen and P. K. Schott, "Importers, Exporters, and Multinationals: A Portrait of Firms in the U.S. that Trade Goods", NBER Working Paper No. 11404, June 2005, forthcoming in Producer Dynamics: New Evidence From Micro Data, T. Dunne, J. B. Jensen and M. J. Roberts, eds., University of Chicago Press.

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