Trade Liberalization and Productivity Growth: Firm-Level Evidence from Cameroon

Abstract

Using a panel of firm-level data, this paper assesses the effects of Cameroon's trade liberalization in the late 1980s and early 1990s on firm productivity growth in the manufacturing sector. A two-step approach is employed. First, a single production function for the whole manufacturing sector is run on the pooled sample of pre-and post-reform periods as well as separately on the pre-and immediately post-reform periods using the Levinsohn and Petrin methodology, and firm productivity indexes are derived. Second, the correlation between trade liberalization and firm productivity growth rates is examined in a regression framework. We focus on the interaction between trade liberalization shocks and firm, industry and environment characteristics. We find a systematic shift in the firm productivity distributions from the pre- to post-liberalization periods in the direction of higher productivity. The manufacturing sector total factor productivity drops in the pre-reform and improves considerably in the post-reform periods. The estimations using pooled pre-and post-liberalization as well as sub-periods firm productivity growth rates show that reductions in effective protection and, even more, increases in export shares are the principal mechanisms of firm productivity improvements. Interestingly, firm, industry and business environment characteristics such as capital intensity, size, age, age squared, competition across industries, and political instability appear to have no influence on the effect of trade liberalization on firm productivity growth.