Trade, Productivity and Profits: On Profit Levels and Profit Margins

VATT Working Papers 80, ISBN: 978-952-274-180-6

45 Pages Posted: 30 Apr 2018

See all articles by Saara Tamminen

Saara Tamminen

Government of the Republic of Finland - VATT Institute for Economic Research

Marcel van den Berg

Statistics Netherlands

Charles van Marrewijk

Utrecht University - School of Economics

Date Written: September 1, 2016

Abstract

Do firms engaging in international trade have higher or lower profit margins? It is well-established that more productive firms engage in trading activities and as a result have higher profit levels. We use two theoretical models (the Melitz model and the Egger-Kreickemeier model) to clarify the relationship between productivity, trade activity, and profit margins and derive three hypotheses: (I) profit margins rise as productivity rises for domestic firms, (II) profit margins rise as productivity rises for trading firms, and (III) profit margins are not higher for trading firms than for domestic firms. We test these hypotheses using detailed micro-data for Finland (2005-2010) and the Netherlands (2002-2010). We find strong support for hypothesis I (in favour of the Melitz model), hypothesis II (in favour of both models), and hypothesis III (in favour of the Egger-Kreickemeier model). A propensity score matching analysis provides further support for hypothesis III.

Keywords: firm competitiveness, firms, international trade, productivity

JEL Classification: F14, L25

Suggested Citation

Tamminen, Saara and van den Berg, Marcel and van Marrewijk, Charles, Trade, Productivity and Profits: On Profit Levels and Profit Margins (September 1, 2016). VATT Working Papers 80, ISBN: 978-952-274-180-6, Available at SSRN: https://ssrn.com/abstract=3161007 or http://dx.doi.org/10.2139/ssrn.3161007

Saara Tamminen (Contact Author)

Government of the Republic of Finland - VATT Institute for Economic Research ( email )

Arkadiankatu 7
P.O Box 1279
Helsinki, FIN-00531
Finland

Marcel Van den Berg

Statistics Netherlands ( email )

CBS-weg 11
Heerlen, Limburg 6412 EX
Netherlands

Charles Van Marrewijk

Utrecht University - School of Economics ( email )

Kriekenpitplein 21-22
Adam Smith Building
Utrecht, 3584 EC
Netherlands
*31-(0)30-2539810 (Phone)

HOME PAGE: http://www.charlesvanmarrewijk.nl

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