Total Factor Productivity and Most Favored Nations Tariffs: Evidence from Croatia

Abstract

Abstract One of the most important topics in empirical trade research is the link between productivity and trade liberalization. In this paper we will focus on the effect of MFN tariffs in the total factor productivity of Croatian firms over the period 2003-2012. This period is characterized by an increased openness toward European Union for Croatian firms. The aim of this paper is to present evidence on the negative link between productivity and tariffs by using the Levinsohn and Petrin (2003) method to estimate productivity of firms. Then we will use TFP as a dependent variable for firm characteristics and trade policy indicator (MFN tariffs). The results are in line with most other studies, confirming the negative relationship between TFP and tariffs. The results show that exporting firms have a higher productivity than non-exporting. We also conclude that up to a certain age productivity increases and then decreases.