A model of trade liberalization and technology adoption withheterogeneous firms

Abstract

This article demonstrates that the reason for a higher capital–labor ratio, observed for exporting firms, is a higher capital intensity of their production technology. Exporters are more productive, more likely to survive and, hence, more likely to repay loans. A higher repayment probability causes creditors to charge lower interest rates, which stimulates exporters to switch to cost-reducing capital-intensive technologies. A reduction in international trade costs stimulates exporting firms to switch to more efficient capital-intensive technologies, while non-exporters stick to less capital-intensive ones. This within-industry change in the composition of technologies reinforces the productivity advantage of exporters and contributes further to industry-wide productivity improvement. The results of model simulations highlight that 5–10% of total welfare and productivity gains of trade liberalization can result from the adoption of new technologies by existing firms in the industry, thus amplifying the effect of resource reallocation arising from firms’ entry and exit.

Keywords:

• firm heterogeneity
• exporting
• productivity
• technological change

JEL Classifications:

• D21
• O33
• F14

Notes

 1. See, for example, Clerides, Lach, and Tybout (1998), Bernard and Jensen (1999), Van Biesebroeck (2005).

 2. Roll (1981) and Titman and Wessels (1988) argue that small firms are riskier and pay more for debt and equity issue. Easley and O’hara (2004) assert that small firms have to provide higher return on investments since they can reveal less information to the public.

 3. Empirical evidence on ‘learning-by-exporting’ hypothesis can be found in De Loecker (2007), Alvarez and Lopez (2005), and Lileeva and Trefler (2009).

 4. Such complementarity between exporting and R&D investment intensity also appears in the models of Ekholm and Midelfart (2005), Costantini and Melitz (2007), Ederington and McCalman (2008), and others.

 5. Similar to our model, Bustos (2009) analyzes the effect of exporting on investment in new technologies, characterized by higher productivity and skilled labor intensity. However, she assumes that more productive technologies are alsomore skilled labor intensive, while in our model factor intensity determines afirm's productivity.

 6. In Section 3.1, we provide empirical evidence of the positive relationship between a firm's survival probability and productivity.

 7. Another reason that larger and more productive firms face lower interest rates that may result in a similar effect is that they have better access to the capital market and can reveal more company information to financial intermediates.

 8. There is an extensive body of literature that documents a negative relationship between interest rate and firm size, e.g. Bond (1983), Berkowitz and White (2004). For the French manufacturing industry Stoyanov (2011) reports the elasticity of interest rate, calculated as a ratio of debt payment over long termdebt, with respect to output being equal to −0.11 with t-statistics −119.5. Similarly, the elasticity of the interest rate with respect to the total factor productivity is −0.28 with t-statistics −76.48.

 9. In line with the empirical evidence from Van Biesebroeck (2005) and Stoyanov (2011) that both exporters and non-exporters operate with the same economies of scale, it is assumed that all available technologies are constant return to scale.

10. In practice, adoption costs are not recoverable. If market conditions change in such a way that new entrants choose to lower capital intensity, the incumbent firms will continue using their current technologies, for which they have already paid adoption costs. However, we still model h(T) as annuity payments since our model is focused on the steady state equilibrium, and in the long run all incumbent firms will be replaced with new ones, which optimally will choose lower T and pay less in adoption costs.

11. Recall that from (2) for any pair of firms n and m. Contrasting average revenue before and after tariff reduction, we obtain . Since the result that implies and . Then, using (19), we obtain the required result: .

12. This result is related to a large body of literature on trade and technology adoption with heterogeneous firms. As Melitz shows, reduction in trade barriers leads to an expansion in the profits of exporting firms and a contraction in the profits of non-exporting ones. Thus, trade cost reduction increases incentives to invest in new technologies by exporters and decreases that of non-exporters, thus amplifying the effect of resource reallocation from non-exporters to exporters. Similar results were obtained by Atkeson and Burstein (2010) and Aw, Roberts, and Xu (2010).

13. Parameters d ₀ and d ₁ were estimated from the logit model of the firm's survival probability on productivity, measured by value added per worker, controlling for the firm's age, legal status, geographical location and industry. Alternatively, productivity was measured with fitted residuals from estimates of the Cobb–Douglas production function and adjusted to account for different scales by matching the survival probability of the 25th and 75th percentiles of productivity in simulation and logit model prediction. Both methods yield very similar statistically significant estimates of d ₀ = 2.9 and d ₁ = 0.08.

14. Parameters of the model are those from the benchmark specification with variable trade costs of 8%.

15. This result follows from the first order condition for technology adoption (7): an increase in industry-average revenue increases the value of capital-intensive technologies for an average firm.

16. Specifically, if the initial capital intensity or capital price premium of exporters were larger, the effect of the mechanism that amplifies productivity gain from within-industry resource reallocation could be even greater. Empirical evidence suggests that these differences may in fact be stronger in other countries. For example, Bernard and Jensen (1999) report a 19% capital–labor ratio premium for US exporters, which is three times greater than that of French exporters. Alvarez and Lopez (2005) report a 60% capital–labor ratio premium for Chilean exporters.