Trade Liberalization and Exports Promotion: A Dynamic and Heterogeneous Analysis Under the Case of Chile

Abstract

We develop a dynamic heterogeneous firm model that embodies a firm's joint decisions to export and innovate and allows both decisions to affect the firm's production growth. We then calibrate the model with data obtained from Chilean manufacturing plants for the period of time between 2005 and 2007 and simulate the impact of trade liberalization under different combinations of industry age and speed of trade liberalization. On the one hand, a quickly implemented trade liberalization policy significantly increases the exports intensity of a young industry newly opening up to the world. The increase in exports intensity is greater with quicker implementation of trade liberalization. On the other hand, trade liberalization for a mature industry does not lead to a significant impact on exports intensity.