What do we need besides trade?

Abstract

Trade has been shown by many authors to have strong positive impact on productivity. However, we also see some others being more reserved about such an impact. This study intends to investigate whether trade is enough for better economic performance, or rather, whether the impact of trade depends on the quality of local institutions. Using a panel of China's provincial data, empirical estimation results show that the better the quality of local institutions, the stronger the positive impact of trade on total factor productivity. If local institutions did not reach a certain quality level, trade expansion could have a negative marginal effect on total factor productivity.