Extensive margins of trade and profitability: evidence from Taiwan

ABSTRACT

Do trading activities matter for a firm’s profitability? This study uses administrative data to examine the relationship between trade activities and profitability for Taiwanese manufacturing firms from 2006 to 2016. Our result shows that trading firms (two-way trade, exporter only, and importer only) have higher profitability than local firms, which do not engage in trade. Moreover, our findings indicate that firms with diversified products and diverse countries as trading partners can increase firm profitability have profit advantages. In addition, we find that country diversification has a stronger effect on profitability than product diversification.

KEYWORDS:

• Exports
• heterogeneous firms
• imports
• profitability
• trade diversification

JEL CLASSIFICATION:

• D22
• F10
• F14

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ The restricted data was analysed at the Research Data Center of Taiwan’s Ministry of Finance. All results are reported without confidential information.

² Taiwan’s regulations stipulate that companies that hire more than five people must provide labour insurance that covers social benefits and pensions for their employees.

Additional information

Funding

The work was supported by the National Science Council [108-2410-H-002-066].