Market concentration, trade exposure, and firm productivity in developing countries: Evidence from Mexico

Abstract

To show how local market concentration affects firm productivity, we exploit a rare database for developing-country standards consisting of five rounds of the Mexican Manufacturing Census and geographically disaggregated data on sectoral exports. Our estimates show that a decline by 10 points in the Herfindahl-Hirschman index, a measure of market concentration, explains an increase by 1 percent in the total factor productivity (TFP) of revenue. We also find that greater exposure to trade offsets and, in most cases, reverses the negative effects of local concentration on productivity. Our heterogeneity analysis also shows that informal firms exhibit a higher probability of exiting the market if competitive pressure and exposure to international markets increase and that firms in the southern region of the country would benefit the most from higher competition and exposure to international markets.