Intra-industry Reallocation Research Articles

Firms heterogeneity and intraindustry reallocation: Beyond dichotomous partitioning

AbstractThis paper studies the trade‐induced reallocation of resources beyond the conventional partition in trade models. It challenges the typical partition of firms into domestic‐only and trading entities. The paper demonstrates that reallocation across heterogeneous firms can occur without such dichotomous partitioning. For reallocation to happen, firms must have different exposure to international markets. The paper uses offshoring models with labor market frictions to illustrate this principle. The offshoring model reveals that labor market frictions induce variations in wage and offshoring intensity. These variations then lead to differential impacts from offshoring cost shifts, resulting in reallocation across heterogeneous firms without partition.

Environmental regulation, firm heterogeneity, and intra-industry reallocation

We describe a model with firm heterogeneity and endogenous pollution abatement to show how emission intensity and exit/entry selections vary across firms. Using Chinese firm-level emission and production data, we find evidence that low productivity firms have higher emission intensity. The emission intensity of firms with productivity below 10 percentile is 5.26 times larger than firms with productivity above 90 percentile. Combining the Annual Survey of Chinese Industrial Enterprises (CIE) data, and applying a triple-difference research design, we find that firms with high emission intensity or low productivity have a higher probability of exit when exposed to strict environmental policy. We also find the exit of unproductive firms contributes to aggregate productivity and strict environmental policy can help to reduce misallocation.

The relationship between labor productivity and number of operating firms

This paper constructs a theoretical model matching empirically observed relationships between average labor productivity and the number of operating firms. The models in the related literature which utilize CES utility function find no relationship between average labor productivity and the number of operating firms in the economy (Melitz, Marc J. [2003. “The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity.” Econometrica 71 (6): 1695–1725] and many versions of this model). Moreover, the models which utilize non-homothetic preferences with a numeraire good find a positive relationship between average labor productivity and the number of operating firms (Melitz, Marc, and Gianmarco I. P. Ottaviano [2008. “Market Size, Trade, and Productivity.” Review of Economic Studies 75: 295–316] and many versions of this model). However, the model developed in this paper provides a single theoretical framework that depending on the source, a rise in the average labor productivity may lead to an increase or a decrease in the number of operating firms. In line with our results, we provide empirical evidence from ten European countries for the 2008–2016 period, which shows that the correlation between these two variables is positive for some of the countries, while negative for the others.

Understanding the Stickiness of Commodity Supply Chains Is Key to Improving Their Sustainability

Summary Commodity trade is central to the global economy but is also associated with socio-environmental impacts, for example, deforestation, especially in producer countries. It is crucial to understand how geographic sourcing patterns of commodities and commercial relationships between places and actors influence land-use dynamics, socio-economic development, and environmental degradation. Here, we propose a concept and methodological approach to analyze the geographic stickiness of commodity supply chains, which is the maintenance of supply network configurations over time and across perturbations. We showcase policy-relevant metrics for all Brazilian soy exports between 2003 and 2017, using high-resolution supply chain data from www.trase.earth . We find that the Brazilian soy traders with the largest market share exhibit stickier geographic sourcing patterns, and that the supply network configurations between production places and traders become increasingly sticky in subsequent years. Understanding trade stickiness is crucial for supply chain accountability, because it directly affects the effectiveness of zero-deforestation commitments.

Firm heterogeneity and exports in the Netherlands: Identifying export potential beyond firm productivity

ABSTRACTAccording to the Melitz [2003. ‘The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity.’ Econometrica 71: 1695–1725] model, potential exporters have to be sufficiently productive to overcome the entry costs of foreign markets. Once firms pass this productivity threshold, they all export. However, empirical evidence indicates that a substantial share of highly productive top-performing firms does not export. In this paper, we focus specifically on this group of high-performing non-exporters and identify the factors that prevent them from successfully exporting. We employ a large Dutch administrative dataset containing both small and large firms in services and manufacturing for the period 2010–2016. Our main findings are two-fold. First, controlling for high productivity identifies other factors that need to be fulfilled for exporting firms. Firm size, import status, and foreign ownership are important determinants of a firm’s future export activity. Second, firm location is crucial. A location in more peripheral areas increases the probability that high-productive firms do not export, whereas a location close to the border increases export probabilities.

The Impact of Institutional Quality on Intra-Industry Resource Allocation

Melitz (2003) embedded heterogeneous firms in monopolistic competition to examine how trade liberalization induces intra-industry reallocation,...

The Role of Trade Adjustment Assistance on Intra-Industry Reallocation of Labor

The Role of Trade Adjustment Assistance on Intra-Industry Reallocation of Labor

Chinese competition: intra-industry and intra-firm adaptation

This paper quantifies how a small and open economy adapts and thereby shapes to what extent it is exposed to competition from China on the world market. Starting from granular firm-commodity-destination-level sales data for the universe of Danish manufacturing firms we construct counterfactual competition exposure, measured as sales weighted Chinese import shares in the home and all export markets while holding the industry composition, the product as well as the destination mix constant. Without adaptation the competition shock after China’s WTO accession would have been more than one and a half times of what has been readily observable. Besides broad industry-level structural change, intra-industry reallocations and intra-firm adjustments through product and destination switching are important adaptation channels. Furthermore, we find some evidence for dynamic quality differentiation as a relevant adaptation margin.

Heterogeneous Firms, Factor Productivity and Trade

Melitz (2003) showed how trade liberalization induces intra-industry reallocation and enhances average industry productivity through selection effect. In his work, firm productivity plays a major role. However, uncertainty was not taken into account. Our paper will focus on firm productivity under uncertainty. From our view, firm productivity might originate mainly from factor uses and institution. Before market entry, one firm can expect own level of firm productivity by the averaged factor productivity. In addition, institutional difference can generate uncertainty of factor productivity because the factor uses are regulated in the institutions. We think that uncertainty of factor productivity can be an important determinant for the model of firm heterogeneity. Particularly, uncertainty of labor productivity can sharply differ across countries due to some inherited attributes. We will augment the work of Melitz (2003) by incorporating uncertainty of factor productivity and will show that the uncertainty determines the selection effect.

Does Plant Size Matter? Differential Effects of Foreign Direct Investment on Wages and Employment in Indian Manufacturing

This paper examines the differential effects, based on the size of the plant, of industry-level foreign direct investment (FDI) on plant-level employment and the wages of skilled and unskilled workers in India's manufacturing sector. On average, there are strong positive differential effects of increased inward-level FDI for large plants relative to small and average-sized plants in terms of employment and the average wages of both skilled and unskilled workers. Small plants experience negative effects from inward FDI, which can be explained by intra-industry reallocation of output from smaller to larger plants. After conducting a regional analysis, I find positive spillovers to small plants in Indian states that receive large and persistent flows of FDI. This suggests that a critical mass of FDI is necessary for small plants to experience positive spillover effects.

FREE TRADE AGREEMENTS AND BRIDGEHEAD EFFECT: EVIDENCE FROM KOREA–CHILE FTA

Recent literature on the dynamics of export destinations has argued that firms export their products to new markets that are geographically close and culturally related to their previous export destinations. A modified version of [Melitz, M (2003). The impact of trade on intra-industry reallocations and aggregate industry productivity. Econometrica, 71(6), 1695–1725.] model suggests that a preferential trade agreement may provide inefficient firms with opportunities to export their products to third destination countries. This paper finds that new Korean products have been exported to the Chile market because of reductions in Chilean tariffs and the experience gained from exporting to the Chilean market has increased the likelihood of subsequent export to other countries in South America. The paper provides direct evidence that a free trade agreement (FTA) can serve as a stepping stone to other markets.

The effect of exchange rate fluctuation on intra-industry reallocation in a firm heterogeneity model with trade and foreign direct investment

Abstract This paper presents a North-South firm-heterogeneity model with trade and two types of foreign direct investment (FDI): vertical and horizontal. We examine the short-run effect of exchange rate changes on intra-industry reallocation. Home currency depreciation concentrates intra-industry resources on export firms and away from domestic and FDI firms. The effect of the depreciation on industry-wide productivity is uncertain in a purely theoretical analysis, but the robust estimation in a fixed effects model using firm-level data (2010–2015) from the Japanese manufacturing industry (general machinery, electric machinery, and transportation equipment) suggests that home currency (yen) depreciation raises industry-wide productivity.

Trade Liberalization, Firm Performance and Labour Market Outcomes in the Developing World. What Can We Learn from Micro-Level Data?

We review the micro-level evidence on the effects of trade and investment liberalization in the developing world. We focus, in particular, on the effects of the 1991 trade reform in India, since it provides an excellent controlled experiment in which the effects of a drastic trade regime change can be measured. The main findings can be summarized as follows. 1) There is evidence of trade-induced productivity gains (in this respect, however, India is something of an exception); 2) These gains mainly stem from the intra-industry reallocation of resources among firms with different productivity levels and: 3) they are larger in import competing sectors; 4) There is no evidence of significant scale efficiency gains. Indeed, unilateral trade liberalization is often associated with a reduced scale efficiency; 5) There is evidence of a pro-competitive effect of trade liberalization; 6) There is no evidence either of learning-by-exporting effects or of beneficial spillover effects from foreign owned to local firms; 7) There is evidence of skill upgrading induced either by technology imports, or by trade-induced reallocations of market shares in favor of plants with higher skill-intensity; 8) There is no evidence of trade-induced increases in labor demand elasticities. Direct evidence suggests, however, that trade exposure raises wage volatility; 9) There is no evidence of substantial employment contraction in import competing sectors.

THE IMPACT OF TRADE LIBERALIZATION ON INDUSTRIAL PRODUCTIVITY

An empirical finding by Trefler (2004, “The Long and Short of the Canada-U.S. Free Trade Agreement”, American Economic Review, 94(4), 870-895) and others that industrial productivity increases more strongly in liberalized industries than in nonliberalized industries has been widely accepted as evidence for the Melitz (2003, “The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity”, Econometrica, 71, 1695-1725) model. We show that under fairly standard assumptions a multi-industry version of the Melitz model does not predict this relationship. Instead, it predicts the opposite relationship that industrial productivity increases more strongly in nonliberalized industries than in liberalized industries.

Emissions Trading, Firm Heterogeneity, and Intra-industry Reallocations in the Long Run

Design of environmental regulation has substantial implications for size distribution and mass of firms within and across industries in the long run. In a general equilibrium model that accounts for endogenous entry and exit of heterogeneous firms, the welfare impacts of emissions trading are analytically decomposed into the effects on economy-wide income, mass of firms, firm size distribution, output price markups, and factor prices. Distortionary impacts on size distribution and permit price depend on the conditionality of permit distribution, interactions between changes in entry-exit conditions and in aggregate accounting conditions, the factor intensity of entry, and coverage of non-pollution-intensive sectors in emissions trading.

Heterogeneous multinational firms and productivity gains from falling FDI barriers

This paper quantitatively assesses the impact of falling foreign direct investment (FDI) barriers on individual firms and its implications for intra-industry reallocation and aggregate productivity. We calibrate the firm-heterogeneity model of Eaton et al. (Econometrica 79(5):1453–1498, 2011) to match micro-level data on Japanese multinational firms facing fixed and variable costs of foreign production. We demonstrate that the calibrated model can be used to replicate the entry and sales patterns of Japanese multinationals. Counterfactual simulations show that declining FDI barriers lead to a disproportionate expansion of foreign production by more efficient firms relative to less efficient firms. A hypothetical 20 % reduction in FDI barriers is found to generate up to a 26.8 % improvement in industry-level productivity through global market-share reallocations within the industry. Compared with fixed entry barriers, reallocation effects and productivity gains are larger for a reduction of variable costs of foreign production.

Trade Liberalization, Intra-Industry Reallocation of Labor and Trade Adjustment Assistance

This paper analyzes how TAA for workers plays a role on intra-sectoral redistribution of labor in response to trade liberalization by placing Riordan and Staiger’s (1993) TAA model within Melitz’s (2003) framework of international trade with heterogeneous monopolistically competitive firms. Due to the existence of asymmetric information of worker quality between firms and workers, high-productivity firms abstain from rehiring workers laid-off from low-productivity firms when the average quality of those workers is relatively low. Hence a job training program of TAA can have an important role in reducing unemployment and income deterioration in low productivity firms, and raise efficiency in high-productivity firms within a sector in response to trade liberalization. In addition, the job training program is more necessary with respect to the process of intra-redistribution of production factors when trade opens at a low level, and also when a sector has comparative advantage, skill-intensive technology and a large portion of low quality labor in the labor market.

The Outward Projection of Italian Firms: Facts and Figures on Foreign Affiliates

In the last two decades or so, globalisation has prompted a great deal of attention in the study of the international organisation of production, with in-depth industry studies on its welfare effects, both for firms and for workers. Outcomes did not prove a unique direction of effects, although the heterogeneous firms’ approach emphasised the intra-industry reallocation through intra-sectoral international competition. Thus, differences in the inner structure of companies filled the gap on the micro-level analysis that featured the study of international trade for several decades, although there is still the need to understand the effects of internationalisation on local systems of production and link such results to the consolidated meso-level of analysis of trade flows. Thanks to the microdata provided by the Italian Statistical Office (ISTAT), we are able to access information on the presence of Italian firms abroad, distinguished by geographical area of origin, destination and industry and check for their influence on affiliates’ structure and performance through appropriate indicators.

A theory of bank versus bond finance and intra-industry reallocation

The purpose of this paper is to assess the impact of targeted financial development on aggregate outcomes, in particular aggregate productivity. The development of the both the bond market and the banking sector can increase aggregate productivity through intra-industry reallocation of production toward more productive firms. This positive productivity effect is expected when the most productive firms have easier access to the bond market. However, the result is surprising in the second case because reducing the frictions involved in bank lending allows the entry by firms at the lower end of the efficiency spectrum at the expense of the largest firms. The key is that the largest firms absorb market share from their competitors who switch to bank-based financing, which has higher variable but lower fixed costs.

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