The Impact of Foreign Trade on Markup Size

Abstract

The aim of this paper is to investigate the procompetitive effects of foreign trade on domestic firms' performance by considering the determinants of markup size using a dynamic panel of Slovenian manufacturing firms from 1995 to 2004. We examine how domestic and foreign firms' encounters affect the domestic firms' pricing decisions and the size of their markups within a single framework by including export orientation of firms and industries and import penetration of foreign firms in an empirical markup model specification. This model is chosen for two reasons. First, markup size measures the changes in competitive pressure, and second, it captures the evolution of price and costs, both of which are affected by effects induced by foreign competition. One of the important advantages of this paper is that it employs a data set covering the whole population of manufacturing firms registered in Slovenia. This is particularly important for studying the impact of foreign trade on industry performance. Second, the analysis is conducted at both the industry and firm levels, which enables us to make a clear distinction between industry-specific and firm-specific factors.