Microeconomic flexibility, creative destruction and trade

Blyde, Juan and Pineda, Jose (2010): Microeconomic flexibility, creative destruction and trade.

Abstract

We investigate whether greater microeconomic flexibility facilitates the process of creative destruction in the context of new trade models with heterogeneous firms (Bernard et al., 2003 and Melitz, 2003). In these models, freer trade increases aggregate productivity because high-efficiency plants expand through exporting and low-efficiency plants exit the market. However, factor reallocation could be negatively affected by the presence of microeconomic frictions. We use these insights of the theory to analyze whether a reduction in trade costs increases the probability of becoming an exporter relatively more in industries with greater microeconomic flexibility and whether plant exit driven by trade costs declines is more likely in industries with lower frictions. Using plant level data from Venezuela, we report results supporting these predictions.

• Item Type: MPRA Paper
• Language: English
• Keywords: Trade costs, microeconomic frictions, resource reallocation
• Subjects: F - International Economics > F1 - Trade > F13 - Trade Policy ; International Trade Organizations; F - International Economics > F1 - Trade > F14 - Empirical Studies of Trade; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O12 - Microeconomic Analyses of Economic Development

References

Aghion, Philippe, and Peter Howitt (1992). “A Model of Growth through Creative Destruction”, Econometrica, 60:2, pp. 323-51.

Alfaro, Laura, Andrew Charlton and Fabio Kanczuk. (2008). “Plant-Size Distribution and Cross- Country Income Differences” NBER Working Papers 14060, National Bureau of Economic Research.

Alvarez, Roberto, and Ricardo López. (2005). “Exporting and Performance: Evidence from Chilean Plants”. Canadian Journal of Economics. Vol 38, No.4, pp. 1385-1400.

Aw, B., S., Chung, and M. Roberts (2000). “Productivity and turnover in the export market: micro-level evidence from the Republic of Korea and Taiwan (China), World Bank Economic Review, 14, pp. 65-90

Bartelsman, E., J. Haltiwanger, and S. Scarpetta (2004). "Microeconomic Evidence of Creative Destruction in Industrial and Developing Countries," IZA Discussion Papers 1374, Institute for the Study of Labor (IZA)

Ben David, D. (1993). “Equalizing Exchange Trade Liberalization and Income Convergence”. Quarterly Journal of Economics, 108 (3), 653–679.

Bernard, A. B., Eaton, J., Jensen, J. B., Kortum, S. S. (2003). “Plants and Productivity in International Trade” American Economic Review 93 (4), pp. 1268-1290.

Bernard, A. B., and B. Jensen (1999). "Exceptional Exporter Performance: Cause, Effect, or Both?" Journal of International Economics, 47(1), pp. 1-25

Bernard, A. B., and B. Jensen (2004). "Exporting and Productivity in the USA", Oxford Review of Economic Policy, Vol. 20, No. 3

Bernard, A. B., B. Jensen, J. Bradford and P. Schott (2006). “Trade costs, firms and productivity”. Journal of Monetary Economics 53, pp. 917-937.

Blyde, Juan, Gonzalo Iberti and Mauricio Mesquita Moreira (2009). “Integration, Resource Reallocation and Productivity: The Cases of Brazil and Chile” Washington, DC: Inter-American Development Bank. Mimeographed document.

Botero, Juan, Simeon Djankov, Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer. 2004. “The Regulation of Labor.” Quarterly Journal of Economics 119 (4), pp. 1339-82.

Caballero, Ricardo and Mohamad Hammour. (1994) “The Cleansing Effect of Recessions” American Economic Review 84(5), pp. 1350-1368.

Caballero, Ricardo and Mohamad Hammour. (2000) “Creative Destruction and Development: Institutions, Crises, and Restructuring” Annual World Bank Conference on Development Economics, April 2000, pp. 213-241

Caballero, Ricardo, Eduardo Engel and Alejandro Micco. (2004). “Microeconomic Flexibility in Latin America” Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, Vol 7(2), pp. 5-26

Clerides, S., S. Lach, and J. Tybout (1998). “Is Learning by Exporting Important? Micro-dynamic Evidence from Colombia, Mexico and Morocco”, Quarterly Journal of Economics, 113.

Dollar, D. (1992) “Outward-oriented developing countries really do grow more rapidly: evidence from 95 LDCs, 1976–1985”. Economic Development and Cultural Change, 40 (3), 523–544. April.

EIU (2008). Country Commerce, Venezuela. The Economist Intelligence Unit. New York, NY.

Eslava, M., J. Haltiwanger, A. Kugler, and M. Kugler (2009) “Trade Reforms and Market Selection: Evidence from Manufacturing Plants in Colombia”, NBER working Paper 14935.

Eslava, M., Haltiwanger, J., A. Kugler, and M. Kugler (2004) “The Effects of Structural Reforms on Productivity and Profitability Enhancing Reallocation: Evidence from Colombia”, Journal of Development Economics, Vol. 75, No. 2.

Fernandes, Ana. 2007. “Trade Policy, Trade Volumes and Plant Level Productivity in Colombian Manufacturing Industries”. Journal of International Economics. Vol 71, No 1: 52-71

Frankel, J., Romer, P. (1999) “Does trade cause growth?” American Economic Review, 89 (3), 379–399. June.

Freund, C. and B. Bolaky (2008) “Trade, Regulations and Income”, Journal of Development Economics. Vol 87, pp. 309-321.

Harrison, Ann (1994). “Productivity, Imperfect Competition and Trade Reform: Theory and Evidence” Journal of International Economics, 36.

Heckman, James, and Carmen Pagés. 2004. “Introduction to Law and Employment: Lessons from Latin America and the Caribbean.” In Law and Employment: Lessons from Latin America and the Caribbean eds. J. Heckman and C. Pagés. Chicago: National Bureau of Economic Research and University of Chicago Press.

Hsieh, Chang-Tai, Klenow, Peter J. 2009, "Misallocation and Manufacturing Productivity in China and India," Quarterly Journal of Economics, (forthcoming).

Kambourov, Gueorgui. 2009, “Labor Market Regulation and the Sectoral Reallocation of Workers: The Case of Trade Reforms” The Review of Economic Studies, 76, 1321-1358.

Levinsohn, James and Petrin, Ariel (2003). “Estimating production functions using imputs to control for unobservables” Review of Economics Studies 70, 317-341.

Melitz, M.J. (2003) “The impact of trade on intra-industry reallocations and aggregate industry productivity” Econometrica 71, 1695-1725

Nicita, A. and M. Ollarreaga (2006) “Trade, Production and Protection 1976-2004”, World Bank document.

Pavcnik, N. (2002). “Trade Liberalization, Exit, and Productivity Improvements: Evidence from Chilean Plants” Review of Economic Studies, 69

Restuccia, D. and R. Rogerson (2008) “Policy Distortions and Aggregate Productivity with Heterogeneous Establishments,” Review of Economic Dynamics, Volume 11 (4).

Rodríguez, F. and Dani Rodrik (2001) “Trade policy and economic growth: a skeptic's guide to the cross-national evidence”. In: Bernanke, Ben, Rogoff, Kenneth S. (Eds.), Macroeconomics Annual 2000. MIT Press for NBER.

Rodrik, D., Subramanian, A., and Trebbi, F. (2004). “Institutional rule: the primacy of institutions over geography and integration in economic development” Journal of Economic Growth, 9 (2), 131–165.

Sachs, J.D., and Warner, A. (1995) “Economic reform and the process of global integration”. Brookings Papers on Economic Activity 1–118.

Segerstrom, P.S., Anant, T., and Dinopoulos, E. (1990) “A Schumpeterian Model of the Product Life Cycle” American Economic Review 80, pp. 1077-1092.

Wacziarg, R., and Welch, K.H., 2003. “Trade liberalization and growth: new evidence”. NBER Working Paper 10152.