Trade Integration, Firm Selection and the Costs of Non-Europe
Gianmarco I.P. Ottaviano
Bocconi University - Department of Economics and Paolo Baffi Centre on Central Banking and Financial Regulation
Massimo Del Gatto
CRENOS - Centre for North South Economic Research; “Gabriele d’Annunzio” University of Chieti-Pescara - Faculty of Economics
Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE)
CORE Discussion Paper No. 2006/61
Centro Studi Luca d'Agliano Development Studies Working Paper No. 218
In models with heterogeneous firms trade integration has a positive impact on aggregate productivity through the selection of the best firms as import competition drives the least productive ones out of the market. To quantify the impact of firm selection on productivity, we calibrate and simulate a multi-country multi-sector model with monopolistic competition and variable markups using firm-level data and aggregate trade figures on a panel of 11 EU countries. We find that EU trade has a sizeable impact on aggregate productivity. In 2000 the introduction of prohibitive trade barriers would have caused an average productivity loss of roughly 13 percent, whereas a reduction of intra-EU trade costs by 5 percent would have generated a productivity gain of roughly 2 percent. Productivity losses and gains, however, vary a lot across countries and sectors depending on market accessibility and trade costs. We provide evidence that our results are robust to alternative distance and productivity measures.
Number of Pages in PDF File: 34
Keywords: European integration, firm-level data, firm selection, gains from trade, total factor productivity
JEL Classification: F12, R13working papers series
Date posted: August 28, 2006
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