The NAFTA tide: Lifting the larger and better boats

Abstract

We use panel data on Mexican manufacturing plants to study the connection between plants' responses to changes in the economic environment and their contributions to aggregate total factor productivity growth, in the period following the implementation of the North American Trade Agreement. An overwhelming share of industry-level aggregate total factor productivity growth is accounted for by a small number of plants, which were larger and more productive before the implementation of NAFTA and expanded and became more productive following the implementation of NAFTA. Plants that exported before NAFTA and exported continuously through to 2000, and new exporters, are more likely to be among the top-performing plants. The performance of plants with similar exporting experience displays, however, remarkable heterogeneity: a significant number of plants that never export have strong output and productivity performance, while many exporters display poor performance. Spending on research and development, and three variables describing plants' level of integration in the global markets – foreign direct investment, use of imported intermediary inputs, and investment in foreign capital goods – are positively correlated with output and productivity performance.

Keywords:

• NAFTA
• trade liberalization
• total factor productivity
• heterogeneity of plant-level performance

JEL Classifications:

• C13
• D24
• F13
• O47
• O54

Acknowledgements

The authors are grateful to John Haltiwanger, Adriana Kugler, Eric Verhoogen, the participants of the conference ‘Job Reallocation, Productivity Dynamics and Trade Liberalization,’ (Bogota, 2005), the participants of the Bank of Mexico Direccion General de Investigacion Economica seminar (July 2005), and Michael Lahr, for their many comments and suggestions. The help from Abigael Duran of the Mexican National Institute of Statistics, INEGI, in Aguascalientes, Mexico, was very useful in the elaboration of this paper. The authors are grateful to him, to Alex Cano, and to the staff of INEGI for making this research possible. The conclusions expressed here and any remaining errors are the exclusive responsibility of the authors.

Notes

 1. Tybout (2003) and Greenway and Kneller (2007) provide reviews of the literature on the relationship between plant performance, exporting, and foreign investment.

 2. Pavcnik (2002), Tybout and Westbrook (1995), and Lopez-Cordova (2002) study trade liberalization episodes in Chile and Mexico; Clerides et al. (1998) use data from Columbia, Mexico and Morocco; Trefler (2004) and Lileeva (2008) use data from Canada following the introduction of the FTA between Canada and the US and NAFTA; Bernard et al. (2006) use data on US manufacturing plants that cover the period between 1982 and 1997 during which tariffs declined by more than 25% in a majority of industries.

 3. A maquiladora or maquila is a factory that imports materials and equipment on a duty-free and tariff-free basis for assembly or manufacturing and then re-exports the assembled product, usually back to the originating country.

 4. Lederman et al. (2003) use sector-level data and find faster convergence rates during NAFTA. Lopez-Cordova (2002) uses firm-level data and finds an increase in TFP in NAFTA years due to preferential access to the US market and import competition, but not from the use of imported inputs. Schiff and Wang (2003) use sector-level data and find that, on the contrary, use of imported intermediary inputs is responsible for TFP growth.

 5. Value added and sales were deflated using a price index generated by INEGI for 205 sectors.

 6. Baldwin and Gu (2003), who study the effects of NAFTA of Canadian firms, report increases in both the number of exporters and export intensity. Bernard and Jensen (2004), who examine the performance of US plants, find that 60% of the export growth is due to changes in exporting intensity at existing exporters. Bernard and Jensen (1999), report that 15% of current exporters will stop exporting and 10% of current non-exporters will enter foreign markets within one year, and Blalock and Roy (2007) find that a 2 to 1 devaluation in Indonesian rupiah caused exit from the export market, large enough to offset the growth of exports at existing exporters and new entries.

 7. The correlation between input levels and unobserved productivity shocks induces simultaneity bias in the OLS estimation.

 8. Plants with low realizations of productivity exit the market. If plants with larger capital stock are more likely to survive negative realizations of productivity shocks, the OLS estimator of the capital coefficient will be biased.

 9. A number of recent papers (e.g. Pavcnik 2002) have used this procedure to estimate production functions.

10. Gu, Sawchuk, and Whewell (2003) and Baggs (2005) analyze the behavior of Canadian plants following the introduction of Canada–USA Free Trade agreement; Gibson and Harris (1996) analyze the behavior of manufacturing plants in New Zeeland during the period of trade liberalization in the 1980s.

11. For the sake of brevity, we do not show the complete results of the principal component analysis. These results are available upon request.

12. We recognize that the distinction we draw here between plants with different dynamic export status is dependent on the relatively short time span of the panel. This classification is simply a convenient description of the eight-year segment of plants' exporting history that we observed in the data set.

13. Previous empirical studies report that exporting plants are both larger and more productive than non-exporting plants (Wagner 2007), while theoretical models (Melitz 2003) predict that more productive domestic plants become exporters. This discrepancy is generated in part by methodological differences. Many of the previous studies focus on labor productivity. Exporting plants have higher capital stock – in this sample, the capital stock of exporting plants is 1.5 to 4 times higher than that of non-exporting plants. If labor productivity increases with the capital stock, exporting plants will have higher labor productivity even if their total factor productivity is identical. Most of the studies that focus on differentials in total factor productivity do not take into account the simultaneity bias and the selection bias induced by non-random plant exits. As our estimation results show, this generates downward bias in the estimates coefficients of capital, and since exporting plants have larger capital stock, artificially higher total factor productivity. The result can also be rationalized in the context of existing models of industrial evolution (Hopenhayn 1992), investment under uncertainty (Dixit 1989; 1992), and exporting decisions (Melitz 2003; Bernard et al. 2003). If there are significant sunk costs of exporting and if returns from exporting are uncertain, large plants will be better able to absorb the sunk costs and incur the risks associated with entry into the foreign markets than smaller plants, even very productive ones. Exporting plants, on the other hand, will find it optimal to accept temporary losses generated by unexpected declines in foreign demand, rather than exit the export markets. As a result, many current exporters may be less productive than current non-exporting plants, and, on average, exporting plants need not have higher total factor productivity.

14. In developing countries, technology acquisition often means adapting existing technologies to local conditions (Tybout 2000). Therefore, R&D expenditure may provide only a narrow measure of technology acquisition. Instead, the share of engineers, technicians and scientists is a better proxy for plant's ability to adopt new technology.

15. Establishments are classified according to the Mexican Classification of Activities and Products, which at a four-digit level is compatible with the International Uniform Industrial Classification.