Trade Liberalization And Industrial Productivity: Theory And Evidence With The Viewpoint Of Firm Heterogeneity

The relationship between trade liberalization and productivity growth has been one of the important topics in economic research. So far, most of the literatures on this topic have made an implicit assumption, that is, all firms in an industry are homogeneous, so that all firms in export sector export when trade liberalized. However, that is not the case. In reality, firm heterogeneity in international trade is a common phenomenon. Some of the studies have showed that exporters usually have superior performances than non-exporters, the co-existence of the exporters and non-exporters among the same narrowly defined industries, is due to the different behaviors among heterogeneous firms when facing export entry sunk costs, and the more productive firms are more likely to enter the export market. Therefore, the recent development of the research in international trade breaking the framework of representative firm, analyzes the impact of trade liberalization on productivity growth with the view of firm heterogeneity, and proposes that trade liberalization can contribute to an aggregate productivity gain through the intra-industrial reallocation. Most of the current literatures showing the impact of trade liberalization on intra-industrial reallocations, however, are based on the assumption of fixed technology in firms. Dynamically, aggregate productivity growth in an industry is not only rooted in the effect of intra-industrial reallocation, but also in the effect of technical progress of firms, and the latter is the most important origin of the long term economic growth. This paper attempts to introduce the fact of firm heterogeneity in international trade, demonstrates the micro-mechanisms of the impact of trade liberalization on industrial productivity in an integrated framework with the view of firm heterogeneity, and provides empirical evidence from Chinese manufacturing using firm-level data.Theoretically, this paper starts with the dynamic behavior of heterogeneous firms in the context of trade liberalization, and shows the micro-mechanisms of the impact of trade liberalization on industrial productivity. Firstly, under the assumption of fixed technology in firms, this paper demonstrates the impact of trade liberalization on industrial productivity through intra-industrial reallocation effect, which is induced by the production and export decision of heterogeneous firms in the context of trade liberalization. The mechanism of intra-industrial reallocation can be summarized as: trade liberalization→industrial export expansion and import penetration→the exit of low-productive firms (market selection effect) and the resource reallocation toward higher-productive firms (market share effect)→the growth of industrial productivity. Secondly, introducing an endogenous technology choice of firms to make an assumption of changeable technology in firms, this paper demonstrates the impact of trade liberalization on industrial productivity through technical progress effect in firms, which is induced by the production, export and technology decision of heterogeneous firms in the context of trade liberalization. The mechanism of technical progress in firms can be summarized as: trade liberalization→industrial export expansion and import penetration→the decline of the introduction costs of the High-Tec technology→more firms choose the High-Tec technology→technical progress in firms→the growth of industrial productivity. Based on the model, this paper puts forward the following testable hypotheses: First, trade liberalization leads to an aggregate industry productivity gain. Second, intra-industrial reallocation and firm-level technical progress lead to an aggregate industry productivity gain with the view of dynamics. Third, trade liberalization leads to the intra-industrial reallocation through raising the probability of firm exit and shifting the market share among surviving firms. Four, trade liberalization increases firm-level productivity.Empirically, this paper uses 2001-2006 Chinese manufacturing firm-level data, tests the four hypotheses proposed in the theoretical section. Firstly, to examine the relationship between trade liberalization and industrial productivity growth as a whole, this paper starts by estimating the impact of industry-level trade liberalization on industrial productivity via a panel data fixed effect OLS regression. Secondly, to show the sources of industrial productivity growth, this paper examines the contributions of intra-industrial reallocation and firm-level technical progress to industrial productivity growth, based on the decomposition of the industrial productivity growth. Thirdly, to examine the micro-mechanisms of the impact of trade liberalization on industrial productivity, this paper estimating the impacts of trade liberalization on intra-industrial reallocation and firm-level technical progress via panel data fixed effect logistic and OLS regression.The main empirical results are following. First, trade liberalization significantly promotes Chinese manufacturing's productivity growth, and export expansion has been the main influencing factor for the growth. Second, during 2001-2006, Chinese manufacturing industries have experienced considerable productivity growth, which are driven by the first reallocation effect (the exit of low-productive firms), the second reallocation effect (the resource reallocation toward higher-productive firms), and the technical progress effect in firms. Among all these driving forces, the technical progress effect is the primary one. Third, the impact of trade liberalization on the first reallocation in significant, which is primarily driven by import competition, because increasing industry-level import penetration significantly increase the probability that low-productive firms exit, but the industry-level export expansion has no significant impact on the probability of exit. However, the impact of trade liberalization on the second reallocation is uncertain, because trade liberalization raises the probability of higher-productivity expand by entering export market, but the impact of trade liberalization on exporters' foreign sales and the domestic market share of surviving firms are not significant. Finally, trade liberalization has played a significant role in firms' technical progress, and the impact of industry-level export expansion on the productivity growth of exporters is bigger than non-exporters, which is in accordance with the conclusion of the reality examination that learning-effect of export is significant in Chinese manufacturing.Based on the above analysis, this paper provides the corresponding policy implications and suggestions, and expects the fully function of the micro-mechanisms of the impact of trade liberalization on industrial productivity, so as to promote the productivity growth of Chinese industry.