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

26 Pages Posted: 17 Sep 2018

See all articles by Marcel van den Berg

Marcel van den Berg

Statistics Netherlands

Charles van Marrewijk

Utrecht University - School of Economics

Saara Tamminen

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

Date Written: August 2018

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 (2005–10) and the Netherlands (2002–10). 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: productivity, profit margins, trade

Suggested Citation

van den Berg, Marcel and van Marrewijk, Charles and Tamminen, Saara, Trade, Productivity and Profitability: On Profit Levels and Profit Margins (August 2018). The World Economy, Vol. 41, Issue 8, pp. 2149-2174, 2018, Available at SSRN: https://ssrn.com/abstract=3247840 or http://dx.doi.org/10.1111/twec.12630

Marcel Van den Berg (Contact Author)

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

Saara Tamminen

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

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

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