Abstract
Standard trade theory suggests that the profile of exporting firms is characterized by large firms which dominate domestic productivity distribution. Large manufacturing multinationals have increased their productivity by participating, creating and shaping global production networks. In recent decades, trade flows have become increasingly dominated by trade-in-tasks within global production networks. Given the importance of pro-competitive effects in establishing the gains from trade following trade liberalizations, it is important to look at the link between participation in global value chains and a firm’s competitiveness. The paper does so by using the International Trade Centre’s competitiveness index, for small, medium-sized and large firms, coupled with global value chain participation measures extracted from multi-regional input-output tables, and together forming a panel dataset at country and firm category level. The main finding establishes that the gains from integration into value chains are greater for small firms than for large firms. In particular, at the sample median, an increase of participation by 2.5% reduces the competitiveness gap between small and large firms by 1.25%. In addition, the analysis suggests that it is the use of foreign inputs that drives the result. In contrast, the domestic value in intermediate goods matters only in cases where value chains respond to domestic demand needs. The identification strategy relies on a fractional probit model allowing for unobserved effects, and a causal framework using the depth of trade agreements as instrument, in order to mitigate potential reverse causality.
Highlights
Trade theory is explicit on the anatomy of exporting firms
(The competitiveness gap is the difference between the average competitiveness score of large firms and the average competitiveness score of small firms in a given country and year.) We find that increasing global value chains (GVCs) participation, at the median, by 2.5% reduces the competitiveness gap, at the median, by 1.25%
We focus on a measure of competitiveness which goes beyond productivity by looking at firm performance in relation to the global environment
Summary
Trade theory is explicit on the anatomy of exporting firms. The typical exporter is large and dominates the productivity distribution of domestic firms (Eaton et al 2011).Opening up to trade entails a reorganization of domestic firms, where the most productive ones expand and less productive ones recess (Melitz 2003). Trade theory is explicit on the anatomy of exporting firms. The typical exporter is large and dominates the productivity distribution of domestic firms (Eaton et al 2011). Opening up to trade entails a reorganization of domestic firms, where the most productive ones expand and less productive ones recess (Melitz 2003). The impact of trade liberalization on firms is heterogeneous and part of the gains from trade revolve around pro-competitive effects. The result is the paradigm behind the contemporary theory of trade in goods. The split of production across borders allows firms to leverage their comparative advantage in a specific task. Instead of building final goods from scratch, they integrate into one stage of the production process. Trade flows are less and less about final goods and more about trade-in-tasks (Baldwin and Lopez-Gonzalez 2015)
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