Trade Reforms and Market Selection: Evidence from Manufacturing Plants in Colombia

Marcela Eslava, John C. Haltiwanger, Adriana D. Kugler, Maurice Kugler

NBER Working Paper No. 14935
Issued in April 2009
NBER Program(s):The Economic Fluctuations and Growth Program, The Industrial Organization Program, The International Trade and Investment Program, The Productivity, Innovation, and Entrepreneurship Program

We use plant output and input prices to decompose the profit margin into four parts: productivity, demand shocks, mark-ups and input costs. We find that each of these market fundamentals are important in explaining plant exit. We then use variation across sectors in tariff changes after the Colombian trade reform to assess whether the impact of market fundamentals on plant exit changed with increased international competition. We find that greater international competition magnifies the impact of productivity, and other market fundamentals, on plant exit. A dynamic simulation that compares the distribution of productivity with and without the trade reform shows that improvements in market selection from trade reform help to weed out the least productive plants and increase average productivity. In addition, we find that trade liberalization increases productivity of incumbent plants and improves the allocation of activity within industries.

Acknowledgments

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Document Object Identifier (DOI): 10.3386/w14935

Published: “Trade Reforms and Market Selection: Evidence from Manufacturing Plants in Colombia” (co - authored with Marcela Eslava, Adriana Kugler and Maurice Kugler), Review of Economic Dynamics , 2013 .

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