Firm Heterogeneity, Trade Costs And Productivity In Service Industries

The relationship between trade costs and productivity is one of the important topics in international trade research; however, so far most of the studies about this topic have a hypothesis that all firms within one industry are homogeneous. But in the real world it is a common phenomenon that firms participaing in international trade are different (especially the productivity differences). A large number of empirical research have shown that no matter in services sectors or in goods sectors, the productivity of export firms is higher than non-export firms’, and firms participating in trade is just a small part of that sector, this is because the existence of sunk costs leads to different choices among heterogeneous export firms, more productive firms tend to participate in international trade. In this background, the latest researches regarding international trade theory break through the representative firms’ analytical framework, and turn to study the productivity effects of trade costs reduction under the firm heterogeneity trade theory. Constrained by the data, the research in this area is still largely confined to goods sectors; the related research of service trade is extremely limited. With the rise of service economy and globalization, the level of service firms participating in international trade has gradually growing, so it is significant for us to survey the micro mechanisms and actual performances of trade costs affecting services productivity. The purposes of this dissertation are studing the industry heterogeneity of China’s service sectors, exploring micro mechanisms of trade costs reduction promoting productivity improvements under service firm heterogeneity, using world input-output table data to measure costs of international trade in services by, and empirically investigate the productivity effects of service trade costs.At the theoretical level, this dissertation investigates the micro mechanisms of trade costs reduction promoting the productivity improvements in service sectors from the perspective of heterogenous firms’ dynamic behavior. Firstly, under the assumption of constant firm productivity, we reveal the production and export decision-making of heterogeneous firms, and the micro mechanism of resources reallocation affecting the services productivity in the context of trade costs decline. The mechanism of resource reallocation effects can be summarized as follows:trade costs reductionâ†'export expansion, import penetration and increased competitionâ†'low-productive firms exit (selection effect) and the resources transfering to high-productive firms (share-shifting effect)â†'productivity improvement in services. Furthermore, with the introduction of service firms’ endogenous technology choice and the assumption of variable firm productivity, we reveal the micro mechanism of technology choice affecting services productivity. The mechanism of firm technology choice effects can be summarized as follows: trade costs reductionâ†'export expansion, import penetration and increased competitionâ†'cost decline of introducing high-techâ†'more firms to adopt high-techâ†'industry technology progressâ†'productivity improvement in services. Finally, a theory hypothesis that trade costs decline can promote service productivity and its growth is proposed.At the empirical level, first of all, based on the latest revision data of China’s services industry, we calculate and analyze the services productivity, and find that the total factor productivity (TFP) is rising, but there exists a big industry heterogeneity for which we put forward three possible explanations; based on the data of service trade and TFP and the consideration of endogenous bias, the fixed effects regression results show that it is service import rather than export promoting productivity growth of China’s service industries. Secondly, on the basis of micro-based method and world input-output table data, we measure the bilateral and unilateral service trade costs, and find that service trade costs are far higher than that of trade in goods, and the decline rate of service trade costs is lower than that of goods trade. The measurement for China shows that China’s foreign bilateral trade costs in services and goods trade are both in downward trend, and the costs of trading with middle-income economies are higher than that of trading with high-income economies. The order of costs from high to low is: consumer services; electricity, gas and water production and supply; construction; producer services; agriculture; mining; and manufacturing. Thirdly, based on the theory analysis and pre-literature’s empirical model setting, we exam the effect of trade costs on services productivity. The results of cross-county panel estimation show that the lower trade costs are linked to higher productivity and faster productivity growth for both service and goods sectors and this effect is mainly reflected in the producer services. The productivity and growth effects of trade costs decline in services are much lower than that of goods sectors. However, in the empirical test for China, we find that the technology gap’s explanatory power is strongest for service sectors, but no evidence show service trade costs decline can promote services productivity, which can be called "productivity effects paradox of China’s bilateral service trade costs" for which we put forward three possible explanations.Based on the theoretical analysis and empirical investigation, we put forward some corresponding policy implications which have strong practical significance for China’s service economy. However, compared with trade in goods, the research for services trade is still not enough. When the firm-level data of service trade (including China) can be obtained, we will further investigate resources reallocation effects and technology choice effects of service trade costs on services productivity, and explain the productivity effects paradox of China’s foreign bilateral service trade costs.