Multilateral Trade Liberalization, Exports and Technology Upgrading: Evidence on the Impact of MERCOSUR on Argentinean Firms

Transcription

1 Multilateral Trade Liberalization, Eports and Tecnology Upgrading: Evidence on te Impact o MERCOSUR on Argentinean Firms Paula Bustos CREI and Universitat Pompeu Fabra July 2007 Abstract Several empirical studies ave documented tat eporters ave positive perormance caracteristics relative to irms only servicing te domestic maret. Weter tese indings imply tat policies tat epand eport opportunities ave a positive impact on irm perormance depends on weter eporting causes better perormance or better irms sel select into te eport maret. In tis paper I investigate te impact o a multilateral trade agreement MERCOSUR on entry in te eport maret and investment in tecnology witin te ramewor o a simple model tat introduces tecnology coice in Melitz 2003 model. In te model, a reduction in variable eport costs increases eporting revenues, inducing more irms to enter te eport maret, and to adopt new tecnologies. Te empirical identiication o te eect o alling Brazilian taris on entry in te eport maret and tecnology upgrading by Argentinean irms is based in te cange in Brazilian taris across 4-digit- SIC industries. I ind tat te average reduction in eport taris 0.24 increases te probability o entry in te eport maret by 0.0 and increases spending in tecnology by 0.20 log points.

2 . Introduction Several empirical studies ave documented tat eporters ave positive perormance caracteristics relative to irms only servicing te domestic maret. Eporters are larger, ave iger labor productivity, capital-intensity, tecnology-intensity and pay iger wages. Weter tese indings imply tat policies tat epand eport opportunities, lie multilateral trade liberalizations, ave a positive impact on irm perormance depends on weter eporting causes better perormance or e-ante good irms become eporters. Tere is ample evidence tat te more productive irms sel select into te eport maret, wic can be rationalized by te model o trade wit eterogeneous irms developed by Melitz In Melitz s model trade liberalization increases aggregate productivity troug a selection eect, as it reallocates maret sares to more productive irms and produces te eit o less productive irms. In tis paper I analyze weter trade liberalization can also induce irms to invest in tecnology upgrading to improve teir productivity. For tat purpose, I develop a simple model tat introduces tecnology coice into Melitz 2003 model and test its predictions in te contet o te launcing o a multilateral trade agreement MERCOSUR. In te model, irms can enter a monopolistically competitive industry by paying a ied entry cost, ater wic teir productivity will be revealed. Ater entry tey can produce using a tecnology tat eatures increasing returns to scale a ied cost and constant marginal cost. Heterogeneity in productivity can be interpreted in two ways: irst, more productive irms ave a lower marginal production cost in te sense tat tey produce more output per unit o labor; second, more productive irms produce a good o iger quality, in te sense tat consumers are willing to pay more or te same amount o te good. Up to tis point te setup is identical to Melitz 2003, but in addition, ater observing teir productivity, irms can coose to pay a ied cost to adopt a new tecnology tat will produce a proportional reduction in teir marginal cost, or a proportional increase in te quality o te good. Ten, in tis setup, tere is a part o irm Te empirical studies include Bernard and Jensen 999 or te U.S.; Clerides, Lac and Tybout 998 or Meico, Colombia and Morocco. 2

3 productivity tat is te result o luc but irms can also tae actions to increase teir productivity. A simple interpretation would be tat beore entering an industry irms engage in product development, but te value o tat product/its marginal production cost is revealed only ater it as been developed and te cost o product development is sun. At te production stage, irms can tae actions to increase te quality o te product or urter reduce its marginal cost, by paying a per period etra ied production cost. Firms tat eport ace bot variable and ied eporting costs, and te latter implies tat only te most productive irms enter te eport maret. 2 Similarly, te presence o ied tecnology adoption costs also implies tat only te most productive irms adopt te new tecnology. Tis result is due to te act tat in te model, a proportional reduction in marginal cost produces a proportional increase in revenues, wic will be iger in value te iger are initial revenues. Ten, only irms wit ig enoug revenues will ind paying te ied cost o tecnology adoption proitable. In tis setup, a reduction in variable eport costs increases eporting revenues, maing it proitable or more irms to enter te eport maret, and to adopt new tecnologies. A reduction in trade costs increases revenues because it reduces te price irms carge abroad and, as te elasticity o demand is bigger tan one, quantities sold increase more tan proportionally. Ten, revenues increase, and as te beneit o tecnology upgrading is proportional to revenues and its cost is ied, more irms will ave enoug revenues to mae tecnology adoption proitable. 3 Te bilateral trade liberalization tat too place between Argentina and Brazil starting in te early 990 s provides a unique set up to test te causal relationsip between alling eport costs and tecnology upgrading. Brazilian taris ell rom an average o 29% in 2 Te result tat only te most productive irms enter te eport maret is due to teir iger potential eporting revenues: as tey ave a lower marginal production cost carge a lower price, wic produces a more tan proportional increase in teir sales because demand is elastic, tus eporting revenues are iger or more productive irms wile ied eporting costs are te same or all irms. As a result, only te most productive irms will ind entering te eport maret proitable. 3 Te relationsip between eporting and quality upgrading as been proposed by Veroogen 2004 wo develops a model were increased trade wit more developed countries increases production o ig quality goods and tests it in te contet o Meico s 994 devaluation. Te mecanism or quality upgrading in is model is not increased revenues or eporters but te iger valuation or ig quality goods o consumers in developed countries. In tis paper te analysis ocuses on trade liberalization between countries o similar level o development, tus te ocus is on increased revenues or eporters to a symmetric country. 3

4 99 to zero in 995 in all industries wit te eception o automobiles and sugar. Te impact o MERCOSUR on Argentina s eports was impressing: between 992 and 996, eports to Brazil quadrupled, wile eports to te rest o te world increased only 60%. As a result, te growt in eports to Brazil eplains 50% o te growt in total Argentinean eports in tat period. I analyze a panel o 388 Argentinean manuacturing irms covering te period Tis data set permits to build a compreensive measure o investment in tecnology, as it includes several dimensions o adoption o new tecnologies suc as spending in computers and sotware; payments or tecnology transers and patents; and spending on equipment, materials and labor related to innovation activities perormed witin te irm. 4 In a irst analysis o te data I cec weter observed caracteristics o eporters are consistent wit te ones predicted by te model. In te model, underlying productivity dierences produce a sorting o irms into tree groups: te low productivity irms only serve te domestic maret and use te old tecnology, te medium productivity irms still use te old tecnology but also eport, and te most productive irms bot eport and use te new tecnology. In tis setting a reduction in variable trade costs will increase eporting revenues tus inducing irms in te middle-range o te productivity distribution to enter te eport maret and upgrade tecnology. Te patterns observed in te data are consistent wit te proposed model: i we compare irms in te same industry at te 4-digit-SIC level, irms tat were already eporting in 992 ave a 0.37 log points iger level o spending in tecnology per worer tan irms tat don t eport beore and ater liberalization, wile irms tat would enter te eport maret ater liberalization, but still do not eport in 992, are not signiicantly more tecnology intensive tan irms tat don t eport in 992 and would not enter te eport maret ater liberalization. In contrast, ater liberalization new eporters become more and tecnology-intensive tan irms tat do not eport, increasing teir spending in tecnology per worer 0.34 log points aster. Interestingly, irms tat 4 Suc as R&D, adaptation o new products or production processes, tecnical assistance or innovations in production, organization, commercialization, engineering and industrial design. 4

5 were already eporting in 992 also increase spending in tecnology 0.27 log points aster tan irms tat never eport. Te patterns in te data described above sow tat tere is a coincidence between entry in te eport maret and tecnology upgrading, but can t establis weter it is epanded eport opportunities tat cause tecnology adoption or viceversa, or weter bot are caused by a tird actor. Ten, a second step in te empirical analysis attempts to establis causality between eporting and tecnology adoption, by lining tese outcomes directly to te reduction in Brazil s taris or imports rom Argentina. Te empirical identiication o te eect o alling eport costs on entry in te eport maret and tecnology upgrading by bot continuing eporters and new entrants in te eport maret is based on variation in te cange in Brazilian taris across 4-digit-SIC industries. Te model predicts tat in industries were Brazilian taris ell more tere will be more entry in te eport maret and also more tecnology upgrading by bot continuing eporters and new eporters. Ten, to asses te direct impact o alling taris on te eport decision I estimate te cange in te probability o a irm entering te eport maret as a unction o te variation in Brazil s taris at te industry level. I ind tat irms in sectors wit a iger reduction in taris are more liely to enter te eport maret. Te average reduction in taris 0.24 increases te probability o entry in te eport maret by 0.0 percentage points. I also estimate te cange in spending in tecnology per worer as a unction o te cange in taris and ind tat irms increase teir spending in tecnology aster in industries were taris all more. Te average reduction in Brazil s taris increases spending in tecnology by 0.20 log points. Net, I investigate weter te cannel suggested by te model is at wor: te drop in eport taris induces tecnology upgrading troug te increase in eporting revenues, versus te alternative eplanation tat te mere act o eporting causes tecnology upgrading as it eposes irms to tecnology and now ow abroad. I te increase in eport revenues is inducing tecnology upgrading we sould observe tecnology upgrading not only in new eporters but also in irms tat were already eporting in 992 and ace a reduction in taris. In act, te reduction in taris as te same positive eect 5

6 on te cange in spending in tecnology wen restricting te sample to irms tat were already eporting in 992. Finally, te same eect is ound wen te sample is restricted to irms tat were not eporting in 992, documenting te eect o tari reductions on tecnology adoption acting troug entry. Te results above suggest tat entry in te eport maret and tecnology upgrading were bot caused by te reduction in Brazil s taris, but an alternative eplanation is tat te cange in Brazil s taris is correlated wit oter industry-level trends tat are causing bot entry and tecnology upgrading. Tus, I perorm a series o robustness cecs to assess weter te empirical identiication strategy is correctly capturing te eects o trade liberalization. Te results reported above are based on a generalized dierences and dierences estimation, were te sources o variation are dierential canges in Brazil s taris across time and across IV- digit SIC industries. Tis estimation is based on te assumption tat tese canges are not correlated wit unobserved industry trends tat migt be correlated wit canges in eport status or canges in spending in tecnology. To cec weter tis assumption is correct, I include industry trends at te 2-digit-SIC level, 5 and a series o eogenous industry caracteristics at te 4-digit-SIC level lie sill and capital intensity o te industry in te U.S., and te elasticity o substitution o demand. In addition, oter canges in taris are included, lie te cange in Argentina s import taris wit respect to Brazil and te rest o te world. Te results are robust to all tese controls, wit point estimates still being signiicant at te 5% level. As a inal cec tat results are not driven by unobserved industry-level socs in te domestic maret tat could be correlated wit canges in taris I sow tat canges in Brazil s taris are not correlated wit growt in domestic sales. Te subject o tis paper is related to a series o empirical studies on te impact o eporting on irm productivity. Tis paper ocuses on a dierent outcome, tecnology upgrading, wic as te advantage o studying a particular mecanism a reduction in variable eport costs and a particular cannel tecnology upgrading troug wic 5 It is not possible to include industry trends at te 4-digit level as tat is te maimum level o desegregation o te tari data. 6

7 eporting can aect irm perormance, and te disadvantage o maing a comparison to te eisting literature arder. Te survey does not provide a good measure o labor or total actor productivity as it does not contain inormation on value added, and capital stoc per irm. Still, i tecnology upgrading is epected to produce increases in labor and total actor productivity, te results on tis paper can be related to te eisting literature. Bernard and Jensen 999 report tat in te U.S. eporters ave iger productivity tan non eporters, but tis is because e-ante more productive irms become eporters, wile tere are no eects o eporting on productivity. Clerides, Lac and Tybout 998 also sow evidence tat te positive association between eporting and productivity is eplained by sel-selection o te good plants in Colombia, Meico and Morocco. Tese two studies base teir conclusions on te comparison o eporters and non eporters across time and not on variation in a trade policy variable. Te evidence reported in tis paper suggests tat causality can also run in te opposite direction, as reductions in variable eport costs induce bot entry in te eport maret and tecnology upgrading. Ten, irms entering te eport maret are not only more productive e-ante but tey also tae actions investment in tecnology targeted towards increasing teir productivity. Tis inding is consistent wit te evidence reported in Treler 2004 or te impact o te Canada-U.S. Free Trade Agreement on Canadian plants: e inds tat Canadian plants in industries wit iger U.S. tari concessions ad aster productivity growt. Te teoretical model presented in tis paper is a general equilibrium version o te model in Bustos Te insigt tat epanded eport opportunities induce more irms to upgrade tecnology was irst developed by Yeaple In is model irms are e-ante omogeneous and eterogeneity in eporting and tecnology coice is an equilibrium outcome: as te low marginal cost tecnology uses silled-labor more intensively wages adjust in suc a way tat in equilibrium all irms are indierent between not eporting and using te low tecnology or eporting and using te ig tecnology. In te model presented in tis paper labor is omogeneous and eterogeneity in eporting and tecnology coice is te result o e-ante eterogeneity in productivity. Additionally, tere is not a ull coincidence between eporting and using te ig tecnology as te least productive eporters migt coose to use te low tecnology. 7

8 Tese last two eatures o te model are important to interpret te empirical indings reported above, were new eporters were more productive tan never eporters beore trade liberalization and irms tat were already eporting also upgrade tecnology wen variable trade costs all. Te remaining o te paper is organized as ollows. Te net section presents te teoretical model and derives te empirical predictions on te eects o trade liberalization on entry in te eport maret and tecnology upgrading. Section 3 describes te trade liberalization episode and te data set. Section 4 presents te empirical strategy and tests te predictions o te model. Section 5 concludes. 2. Teory Tis section develops a simple model o te decision to enter te eport maret and upgrade tecnology by eterogeneous irms. I will consider an economy consisting o a single monopolistically competitive industry were irms produce dierentiated products under increasing returns to scale, and using a single actor o production, labor, as in Krugman 979, 980. Firms are eterogeneous in productivity and ace ied eporting costs as in Melitz 2003, and can coose to increase teir productivity by paying a ied tecnology adoption cost, as in Yeaple I irst present te closed economy model, and later its open economy version were two symmetric countries trade. 2. Closed Economy Set up o Te Model Demand Tere is a representative consumer wit CES preerences over a continuum o varieties o a good: U ω Ω q ω ρ dω ρ 0 < ρ < Consumers maimize subject to te budget constraint: ω Ω p ω q ω dω E 8

9 Ten, demand or a particular variety is: q ω E P p ω P were / ρ > is te constant elasticity o substitution and P p ω dω ω Ω Supply Te supply side is caracterized by monopolistic competition. Eac variety is produced by a single irm, and tere is ree entry into te industry. Firms produce varieties using a tecnology tat eatures a constant marginal cost and a ied cost, bot in terms o labor. Firms are eterogeneous in teir productivity in te sense tat marginal labor costs varies across irms using te same tecnology. Tis idiosyncratic component o labor productivity will be indeed by, tat also indees irms and varieties. Firms also can coose to upgrade teir tecnology in te ollowing sense: by paying an additional ied cost tey can reduce teir marginal cost o production. Tis can be represented as a coice between two dierent tecnologies l and, were eatures a iger ied cost and a lower marginal cost. Te resulting total cost unctions under eac tecnology would be: TC l TC q q η γ 2 were η > and γ >. Entry and timing Beore starting to produce a given variety irms ace uncertainty regarding teir productivity level. Upon entry tey pay a ied cost consisting o units o labor, and draw teir productivity level rom a nown cumulative distribution unction e 9

10 G. Ater observing teir productivity tey decide weter to eit te maret or start producing wit one o te tecnologies in eq. 2. Finally, in every period tere is an eogenous probability o eit δ. Firm Beavior Ater observing teir productivity irms coose te proit maimizing price and tecnology given te equilibrium price level P. First tey calculate te price tat attains te maimum proits under eac tecnology. Ten, tey coose te tecnology tat attains iger proits. I proits are negative under te best tecnology coice tey eit. Proit maimization Under CES preerences te proit maimizing price is a constant marup over marginal costs. Ten, a irm wit productivity using tecnology l will carge te ollowing price: ρ l p te resulting quantity sold, revenues and proits are: P E r P E q p r EP q l l l l l l ρ π ρ ρ 3 For irms using tecnology prices, quantities sold, revenues and proits are : η γ ρ η π γ ρ γ ρ γ ρ P E r P E q p r EP q p 4 Tecnology coice 0

11 i: Firms will use te tecnology tat attains iger proits, ten tey will use tecnology π > π l E Pρ γ > η 5 Note tat te cost o tecnology upgrading te RHS o eq. 5 is te same or all irms wile te beneit te LHS o eq. 5 is increasing in te irm's productivity. Ten, tecnology adoption will be caracterized by a cuto productivity level above wic all irms will use tecnology. Tecnology coice is represented in Figure, were are proits or using tecnology as a unction o productivity and π l are proits or using tecology l. π Figure I: Tecnology Coice H π L π η Eit * Tecnology Low Tecnology Hig Eit Te epected present value o proits is: ts v ma 0, δ π ma 0, π t s δ

12 As proits are increasing in productivity, irms below a certain tresold will mae negative proits and eit. Note tat, as only te most productive irms adopt tecnology, tis tresold will be deined by te zero proit condition under tecnology l: π l E Pρ 0 6 Industry Equilibrium To solve or te equilibrium price P, number o irms M and te distribution o active irms' productivities in te economy it will be convenient to write all te equilibrium conditions as unctions o te eit cuto wic in turn will be determined by te ree entry condition. I will irst write as a unction o.te productivity cuto or adopting tecnology is given by implies: π π l, wic γ E Pρ η 7 Net, can be epressed as a unction o using te deinition o te eit cuto eq. 6 to substitute or te price inde P and income E in eq. 7: η γ 8 Ten, as long as η >, wic is te case wen η > γ, only te most γ productive irms use tecnology and te raction o surviving irms adopting G tecnology is: G η. γ It will also be useul to deine ~ as te e-post weigted average productivity level o surviving irms, were e-post means tat or irms adopting tecnology eective productivity is γ, and e-post productivities are weigted by te elasticity o substitution to relect teir impact on te price inde: 2

13 < < < γ d G g d G g 9 Te average productivity level o surviving irms can also be epressed as a unction o te cuto by substituting rom eq. 8 in eq. 9. An eplicit solution can be obtained by using te Pareto distribution: ~ 0 were γ η γ As prior to entry irms don't now teir productivity level, ree entry implies tat te present value o epected proits equals te sun entry cost: [ ] _ π δ G e 2 were G is te probability o survival and are per-period epected proits o surviving irms: _ π η ρ π G G P E ~ _ 3 were G G is te probability o adopting tecnology. 6 6 To obtain equation 7 note tat i _ r are epected revenues o surviving irms: 3

14 To solve or te ree entry condition 2 it is convenient to epress epected proits in terms o te eit cuto. Ten by substituting 6 in 3 epected proits can be written as a unction o : η π ~ _ 4 and by substituting ~ by 3 and by 8 average proits can be written as: _ π 5 Note tat epected proits are independent o, wic is due to te use o a Pareto distribution or G. In general, canges in ave two eects on epected proits: a direct positive eect as eac irm as a iger productivity wic maes eac irm's proit increase; and an indirect negative eect as a iger implies productivity o competitors is iger, tus te price inde is lower and eac irm's proits all. In te case o a Pareto distribution bot eects cancel out, and as a result average proits are independent o te cuto. To interpret te ormula or epected proits it is convenient to write as: γ η η ~ _ < < < < < < ρ γ ρ γ ρ ρ P E r d g d g G P E r d g P E d g P E G r 4

15 were η is te ied cost o tecnology and is te raction o irms tat use tecnology, ten can be interpreted as te average ied production cost o surviving irms. Note tat i tere was only one tecnology available ten average proits would be te same as in 5 but wit. In tat case, epected proits tae te simple orm o a multiple o te revenues o te marginal irm wic must equal te ied production cost. In te case were tecnology becomes available epected proits increase by te additional ied production cost o te marginal irm adopting tecnology multiplied by te raction o irms adopting tecnology :. Te option to upgrade tecnology tus increases epected proits, te reason being tat te marginal adopting irm gets no increase in proits or adopting, but all te irms above must be maing positive adoption proits as adoption generates iger revenues or tem but tey pay te same te same ied cost as te marginal adopting irm. Free entry implies tat te present value o epected proits: _ π δ must equal te sun entry cost:. Te solution or te entry cuto is ten: e 6 δe Te eit cuto in te case o only one tecnology is te one corresponding to, [ ] > ten as γ η te eit cuto increases in te case irms can coose to upgrade tecnology. Te reason is tat te most productive irms can increase teir proits by adopting tecnology, wic increases epected proits and induces entry. As a result, te price inde alls or wages increase so tat te least productive irms mae negative proits and eit. By substituting 6 in 8 te productivity cuto to adopt tecnology can be obtained: η 7 δe γ 5

16 Average productivity o surviving irms can be obtained by substituting eq. 6 in eq. 9: [ ] ~ δ e 8 Welare can be measured by te real wage, wic is te inverse o te price inde P, as te wage is te numeraire. Te price inde can be written as a unction o average productivity and te measure o irms M by canging te integration variables in equation : ρ M d G g M p P 9 To solve or te measure o irms note tat it can be obtained by dividing total revenue in te economy by average revenue _r E M. By te equality o income and ependiture, L E and _ r can be obtained rom average proits:, ten r π M _ π L, and substituting or rom eq. 5 _ π L M 20 Te solution or te price level can ten be obtained by substituting eq. 20 and eq. 8 in 9: L P e δ ρ 2 Te ollowing subsection discusses te eects o a reduction in te cost o adoption on tecnology coice and average productivity in te closed economy. It can be useul to build intuition on te worings o te model, but tis comparative static result will not be taen to te data so tis subsection can be sipped to continue reading te open economy version o te model. 6

17 Eects o a reduction in te cost o adoption Te closed economy model can be useul to analyze te eect o a reduction in te relative cost o new tecnologies in a setting were initial productivity dierences can give rise to eterogeneity in te adoption decision. As all variables o interest depend on te cost o adoption η only troug, it suices to note tat: γ η η < 0 because >. Ten, epected proits increase as η alls. To interpret tis result note tat epected proits are a multiple o epected ied cost, ten wen te cost o adoption alls, revenues rom adoption must all, but as te sare o irms adopting tecnology grows aster epected proits still increase. Tus, in a sense, te reduction on te cost o adoption is reducing te ecess proits w.r.t. te marginal active irm o te most productive irms tat ad already adopted, but increases te ecess proits o new adopters, and te second eect dominates. Tis result relies on te assumption tat >, tat implies tat te density o te irm productivity distribution alls aster tan te maret sare o more productive irms increases wic is a necessary assumption or te average productivity in te industry to be inite. Te increase in epected proits would induce entry in te industry and tus te eit productivity cuto must all. As bot te eit productivity cuto alls and te sare o irms using tecnology increases, average productivity in te industry wic reduces te price level P and increases welare ~ grows, P. At te same time, te measure o irms M alls: tis is simply te result o te increase in te "average ied cost" in te economy: altoug te ied cost to adopt tecnology alls, te sare o irms adopting increases more tan proportionally and as a result te average ied cost increases. As on average irms are using more labor to cover te ied production cost an economy o size L would support less irms or varieties in equilibrium. Te reduction in te measure o varieties will increase te price inde and reduce welare, 7

18 but te net welare eect o te all in tecnology adoption cost is positive as te increase in average productivity overweigs te reduction in varieties. In sum, a reduction in tecnology adoption cost will increase welare by inducing bot selection o better irms into te industry and an increase in te productivity o te irms tat adopt tecnology. 2.2 Open Economy In te absence o trade rictions te open economy model is identical to te closed economy one, ecept tat te relevant size o te economy L would increase to incorporate te size o all trading partners. Ten, in te solution o te closed economy equilibrium presented above only L would cange wen opening up to trade, and tus tecnology adoption would not be aected as would stay constant. Te eit cuto would not cange eiter tus average productivity would remain te same. Te only eect o opening up to trade would be an increase in te measure o irms, or varieties oered worldwide, increasing welare troug a corresponding all in te price level, eactly as in Krugman's model Krugman Similarly, i tere were only variable trade costs all irms would eport and, as will be sown below, a reduction in variable trade costs would ave no eect on tecnology adoption. Tus, I will introduce two types o trade rictions:. Per-unit iceberg costs, so tat units need to be sipped or unit to mae it to te oreign country. e 2. An initial ied cost o units o labor to start eporting, incurred ater irms ave learnt. I will consider te simple case o two symmetric countries tat engage in a bilateral trade liberalization, tus all parameters, including will be identical or bot countries. 8

19 Firm Beavior Proit Maimization Proits rom sales in te domestic maret would be identical as in te closed economy eqs. 3 and 4 wit te eception tat te price inde P now taes into account te prices o varieties imported rom oreign. Proits rom eport sales under tecnology l, as an eample would be: π e l E Pρ were te symmetry assumption implies tat te price inde P and te ependiture E level in oreign are te same as at ome. Revenues in te eport maret are reduced in a raction price in te eport maret relecting te etra variable trade costs tat get translated in a iger l ρ p and produce lower revenues because demand is elastic >. Finally, eporting proits relect te per-period ied eporting cost. To analyze te joint decision o weter to enter te eport maret and weter to adopt tecnology, irms compare te total proit o eac o te our resulting coices, wic are: Proits i only servicing te domestic maret and using tecnology l: d π l r l E P ρ Proits i only servicing te domestic maret and using tecnology : d π r l E Pρ γ η Proits i also eporting and using tecnology l: π l r l E Pρ Proits i also eporting and using tecnology : 9

20 π r l E Pρ γ η Eporting and tecnology coices are represented in Figure 2, were te our possible proits are depicted as a unction o irm's productivity more precisely a transormation o irm's productivity: dierent groups: te least productive irms < <. Te case represented is one were irms sort into our < eit, te low productivity irms only serve te domestic maret and use tecnology l, te medium productivity irms < < still use tecnology l but also eport, and te most productive irms <. bot eport and use tecnology. Tis case is be obtained wen < were is deined as te level o productivity above wic a irm using tecnology l will ind eporting proitable, and is deined as te level o productivity above wic an eporter will ind adoption o tecnology proitable, as can be seen rom igure one. In Bustos 2005 I sow tat wen < te maimum proit unction as te sape depicted in igure one: it is te upper envelope o te our proit unctions corresponding to eac combination o te tecnology and eporting coices, but using tecnology and only servicing te domestic maret is always dominated by some oter coice, and tere is a range o productivity levels were eporting is proitable but adopting tecnology is not, so tat te marginal eporter uses tecnology. I will ocus in tis case < in wat ollows and provide te necessary parameter restrictions or tis ordering o cutos to apply. 20

21 Figure 2: Eporting and Tecnology Coice Maimum Proit Function π - π l π d l π π d η η Eit * Tecnology L Don t Eport Tecnology L Eport Tecnology H Eport As in te closed economy, to solve or te equilibrium price P t, measure o irms M t and te distribution o active irm's productivity in te economy it will be convenient to write all te equilibrium conditions as a unction o te eit productivity cuto, using te zero proit condition or te marginal active irm to partial out te eects o te aggregate variables E and P on irm's proits, and leave te eport and tecnology adoption cutos as unctions only o te parameters tat aect tose groups o irms dierentially. Ten, I net state te conditions or eit, entry in te eport maret and tecnology adoption as a unction o te eit cuto. Eit For te least productive irms proits are igest wen using tecnology l and only serving te domestic maret, ten te eit cuto is be deined by: d π l 0 E Pρ

22 Eporting Te marginal eporting irm uses tecnology l, tus te eporting cuto is deined by: d π l π l E Pρ 0 23 can be epressed as a unction o te marginal irm eq. 22 in eq. 23: by substituting te zero proit condition or 24 note tat as long as > Tecnology Coice, > tus only te most productive irms eport. Te marginal irm adopting tecnology is an eporter, ten te adoption cuto is deined by: π π 0 γ E Pρ η l 25 As in te closed economy, te beneit o tecnology adoption te LHS o eq. 25 is proportional to a irm's variable proits wic in te open economy case are iger by a actor as irms do not only sell at ome but also in te eport maret. Tus, te eporting option increases te proitability o tecnology adoption. can be epressed as a unction o by using te zero proit condition or te marginal irm eq. 22: η γ 26 Te sare o active irms adopting tecnology is iger in te open eq. 26 tan in te closed economy eq. 8 as te cuto or adoption alls relative to te eit 22

23 cuto because <. Tis is so because in te open economy eporting increases revenues, maing tecnology adoption more proitable. Note tat tis is true only i te marginal irm is a non-eporter; i te marginal irm was an eporter ten te sare o irms adopting tecnology would be te same in te closed and open economy and would ave no impact on tecnology coice. By comparing eqs. 24 and 26 we can see tat te parameter restriction or > is tat tecnology adoption costs are ig enoug relative to ied eporting costs: η γ > Industry Equilibrium Te eit cuto will be determined by te ree entry condition: _ [ ] π t e G 27 δ tat is identical to te closed economy one ecept tat epected proits account or te possibility o eporting: _ π t will now ~ _ ~ π t π d p π 28 d were ~ d is te epected productivity level o ome surviving irms tat as te ~ same epression as in te closed economy eq. 9 and π d d are epected proits rom domestic sales, tat ave te same epression as in te closed economy eq. 3, G p is te probability o eporting and π are epected eporting proits: G _ ~ _ ~ _ ~ ~ π E Pρ 29 were ~ is te epected productivity level o ome irms tat eport: 23

24 ~ g d < < γ g d < 30 Ten, to solve or te ree entry condition eq. 27 we need to write _ π t eq. 28 as a unction o te eit cuto. π d d can be written as a unction o te eit cuto by substituting or te solution or _ ~ eq. 26 in eq. 3 and by using te zero proit condition or te marginal irm eq. 22 to eliminate te aggregate variables E and P in eq. 3. _ π ~ substituting or te solution or ~ eq. 30 to obtain eq. 29 can also be written as a unction o te eit cuto by ~ and eqs. 24 and 26 in te deinition o and also using te zero proit condition or te marginal irm in te oreign country tat is identical to te one at ome eq. 22 because o te symmetry assumption to eliminate te aggregate variables E and P. Ater some algebra, te solution or epected proits is: _ π t 3 t η t η 32 γ To interpret te solution or epected proits note tat t can be written as: t Ten, te solution or epected proits as te same orm as in te closed economy: epected proits are a multiple o epected ied costs t. Note tat tis is te case because wit a pareto distribution epected proits are a multiple o te variable proits o te marginal irm. In te simplest case o a closed economy wit only one tecnology t and ten epected proits are a multiple o te variable proits o te marginal surviving irm, wic must be equal to. Te addition o te eporting 24

25 possibility implies tat or eporters, wic are a raction o te surviving irms, epected proits will be augmented by a multiple o te variable eporting proits o te marginal eporters wic are.tus, te possibility o eporting will increase epected proits in te same way as in te model in Melitz Finally, or tecnology adopters, wic are a raction o surviving irms, epected proits will be augmented by a multiple o te variable eporting proits o te marginal adopters wic are eactly as in te closed economy model. Still, te introduction o bot te option to eport and te option to upgrade tecnology as an eect on epected proits beyond te sum o te two parts: tere is an interaction between te two options as in te open economy te raction o irms adopting tecnology is iger tan in te closed economy by a actor > because teir proits are iger tan tose o te marginal irm due to te eporting revenues, as discussed above. By substituting te solution or average proits eq. 3 in te ree entry condition eq. 27 we can solve or te eit cuto: t t 33 δe By substituting te solution or te cuto in eqs. 24 and 26 a solution or te eporting and tecnology adoption cutos can be obtained: δe t 34 η δ e γ t 35 And inally, te price inde can be obtained by substituting te eit cuto eq. 33 in te zero proit condition or te marginal surviving irm eq. 22: 25

26 P t ρ L δ e 36 Bilateral trade liberalization In tis section I analyze te eects o a reduction in variable eport costs on entry in te eport maret and tecnology upgrading. First, it is easy to note by looing at eqs. 24 and 26 tat a reduction in will increase te raction o surviving irms tat eport and te raction o surviving o irms tat use tecnology. A all in increases eporting revenues inducing more irms to eport and also increases te beneit o tecnology adoption, inducing more irms to adopt tecnology. Tis results in iger epected proits as: _ π t t < 0 because >, > and t η γ η < 0 Te increase in epected proits induces entry into te industry, and as a result te price inde at ome alls or te real wage and welare increase, as can be seen rom equation 36 were te sign o P is te opposite o te sign o t. As te price inde at ome alls, irms only servicing te domestic maret see teir revenues reduced and tus te least productive ones eit te industry. As a result, te eit productivity cuto increases, as can be seen rom equation 33 were te sign o t is te same as te sign o t. Tus, eactly as in Melitz 2003 a reduction in variable eport costs induces te eit o te least productive irms in te industry. Note tat altoug te sare o irms entering te eport maret and te sare o irms adopting tecnology increases, meaning tat and all, it could be in principle possible tat and increase as te eit cuto is increasing. Indeed, te 26

27 reduction in as two eects on eporting revenues: irst a direct positive eect as eporters reduce teir price and sales react more tan proportionally > ; second, an indirect negative eect as te price inde at oreign alls because o entry o more productive irms and tecnology upgrading at oreign, entry o new eporters rom ome, tecnology upgrading o ome eporters and te reduction o te prices carged by all ome eporters. In Appendi I sow tat te direct eect dominates tus eporting. revenues increase and > 0 Wit respect to te beneit o tecnology upgrading, wic is proportional to total revenues, te reduction in ten increases eporting revenues but reduces domestic revenues as te ome price inde alls. P alls because tere is entry o oreign irms, a iger sare o ome irms use tecnology and te least productive ome irms eit. I also sow in te appendi tat te irst eect dominates so tat > 0 as long as not all irms eport >. Ten, bilateral trade liberalization as an eect on tecnology adoption only i not all irms eport. Te intuition or tis result is tat i all irms eport, ten te marginal irm would be an eporter and tus would be deined by: E Pρ 0 π l 0 37 and tus te tecnology adoption cuto would be η γ and epected proits would be _ π t η γ Ten, a reduction in would not aect epected proits, and tus te eit cuto would also remain unaected. As a result, as can be seen in eq. 37 te price level would all in suc a way to oset te increase in revenues produced by te all in, tus te beneit o tecnology adoption tat is proportional to revenues would not increase. Te 27

28 reason wy tis does not appen wen not all irms eport is tat te reduction in produces an advantage or te more productive irms relative to te marginal irm, tus its positive impact on revenues is not oset by ree entry. Te results tat > 0 and > 0 are important to establis or empirical wor as only i tese cutos all a reduction in variable eport costs induces entry in te eport maret and tecnology upgrading by irms tat did not eport or adopt tecnology beore trade liberalization, wic are te testable implications o te model I tae to te data in te ollowing section. 3. Contet and Data 3. Trade Liberalization Argentina started reducing import taris wit respect to te rest o te world beore MERCOSUR was launced. Between October 988 and October 99 tere were major revisions on trade policy, oten related to canges in macroeconomic policy aimed at controlling yperinlation. By October 99, te average nominal tari was 2%, ranging rom 0% or capital goods not produced in te country to 22% or consumption goods. Almost all import licenses were eliminated, wit te eception o te automobile industry. MERCOSUR was establised by Argentina, Brazil, Paraguay and Uruguay in Marc 99. Te agreement included te progressive elimination o tari and non tari restrictions to trade, and te adoption o a common tari wit tird countries. Tere was a transition pase between 99 and 994 tat consisted o progressive tari reductions aimed to acieve ree trade witin te region by te end o 994. Te Customs Union was establised in 995 wit te adoption o a Common Eternal Tari CET, wit an average level o %. Taris varied between 0 and 20% across industries. Inputs and materials ad te lowest taris, ollowed by semi-inised industrial goods, and inal goods. Tere were eceptions to internal ree trade or a limited number o products, special regimes or sugar and automobiles and some products aced tari rates dierent rom te CET. As a result o te agreement, in 996 te import weigted average intra- 28

29 MERCOSUR tari was 0.86% or Argentina and 0.02% or Brazil, wile te etra-zone average tari was 3.7% and 5.44% respectively. Te panel I analyze covers te period , tat is coincident wit te multilateral trade liberalization, but posterior to Argentina s unilateral trade liberalization. As a result, Argentinean import taris ad already been reduced in te period under study. In act, between 992 and 996 average import taris increased sligtly.28%. Te modiications on import taris during tis period are partly related to te reduction in taris witin MERCOSUR, and te convergence to te CET, tat partly relected te structure o protection in Brazil. Figure.a reports te requency o te cange in import taris rom Argentina wit te rest o te world or 4-digit SIC industries, were witin eac 4-digit-industry taris or dierent tari lines HS 988 and origins are weigted by imports. 7 Te reduction in import taris rom Brazil is reported in Figure.b. Te average reduction was only 2 percentage points, as import taris in Argentina were already low beore MERCOSUR was launced. In act, imports rom Brazil grew eactly at te same rate as imports rom te rest o te world during tis period 60%. MERCOSUR ad a muc bigger impact on Argentinean eports. Between 992 and 996, eports to Brazil quadrupled, wile eports to te rest o te world only increased 60%. As a result, growt in eports to Brazil eplains 50% o te growt in eports during tis period. Tis migt be related to te deep reduction in Brazilian taris or imports rom Argentina, wic ell on average 24 percentage points, wit a maimum all o 63 pp. Figure 2 reports te requency o te variation in Brazilian import taris or 4- digit SIC industries. Tis variation relects import taris in 992, as all taris were zero in 995, ecept or te automobile sector. 3.2 Firm-Level Data Te data I analyze comes rom te Survey on Tecnological Beavior o Industrial Argentinean Firms [Encuesta sobre la Conducta Tecnologica de las Empresas Industriales Argentinas ETIA] conducted by te National Institute o Census and Statistics in Argentina INDEC. Te survey covers te period and was conducted in Te source o tari data is TRAINS. 29

30 over a representative sample o,639 industrial irms. Te sample was based on 993 census data and covers 40% o total industrial sales and employment in 996. As te survey was conducted in 997, it does not contain inormation on irms tat were active in 992 and eited aterwards. I ocus my analysis on a balanced panel o,388 irms present bot in 992 and 996 or wic tere is inormation on sales, employment and belong to 4-digit-SIC industries wit inormation on Brazil s taris. Te survey contains inormation on several dimensions o spending on tecnology upgrading. Firms upgrade tecnology by perorming various innovation activities lie internal R&D, paying or tecnology transers and buying capital goods tat embody new tecnologies; and wit dierent purposes lie canging production processes, products, organizational orms or commercialization. I constructed a measure o spending on tecnology ST tat includes tese dierent dimensions: spending on computers and sotware; payments or tecnology transers and patents; and spending on equipment, materials and labor related to innovation activities perormed witin te irm. 8 Te survey contains inormation on ST or all years in te period , wile inormation on all te rest o te variables sales, eports, imports, employment by education, investment is only available or te years 992 and Sector-Level Data In te empirical section I use controls or 4-digit-SIC industry caracteristics tat migt be correlated wit canges in taris. First, average capital and sill intensity in te industry in te U.S. in te 980 s obtained rom te NBER productivity database. Te measure o capital intensity is capital real equipment plus real structures per worer, altoug oter measures lie only real equipment capital per worer, or capital over value added provide similar results. Te measure o sill intensity is te ratio o non production to production worers in te industry, altoug te relative wage sare o non production worers was also used providing similar results. Finally, I use te elasticity o substitution in te industry as estimated by Broda and Weinstein Lie R&D, adaptation o new products or production processes, tecnical assistance or production, engineering and industrial design, organization and commercialization 30

31 4. Empirics In tis section I test te predictions o te teoretical model developed in section 2. First, I cec weter observed caracteristics o continuing eporters irms tat eported bot in 992 and 996 and new eporters irms tat did not eport in 992 but did eport in 996 relative to non-eporters in te same 4-digit-SIC industry are consistent wit te sorting pattern predicted by te model. Second, I test weter irms are more liely to enter te eport maret and upgrade tecnology in industries were Brazil s taris ell more. 4. Witin-industry patterns in te data In te model, underlying productivity dierences produce a sorting o irms into tree groups: te low productivity irms only serve te domestic maret and use te old tecnology, te medium productivity irms still use te old tecnology but also eport, and te most productive irms bot eport and use te new tecnology. In tis setting a reduction in variable trade costs will increase eporting revenues inducing irms in te middle-range o te productivity distribution to enter te eport maret and upgrade tecnology. Figure 3 illustrates te eects o trade liberalization or irms in eac part o te productivity distribution. Note tat irms wit initial productivity > 0 eporting and ig tec beore liberalization, irms in te range < < were already were already eporting beore Brazil s taris drop, but will ind it proitable to adopt te new tecnology only aterwards, as teir eport revenues increase. Tus, under tis ordering o cutos, we epect tat, on average, continuing eporters increase teir spending in tecnology. Net, irms in te range < < 0 te new tecnology, wile irms in te range < < will enter te eport maret and adopt H enter te eport maret but eep te old tecnology. Ten, we would epect tat, on average, new eporters increase spending in tecnology

32 Figure 3: Eect o alling variable eport costs * 0 X H * X H 996 Eit Stay Non Eporter Low Tec Start eporting Stay Low Tec Start eporting Switc to Hig Tec Continue eporting Switc to Hig Tec Continue eporting Stay Hig Tec Table reports dierences between eporters and non eporters witin te same 4- digit-sic industry beore liberalization: irms tat were already eporting in 992 are on average 2.8 times bigger in terms o sales tan never eporters, wile irms tat would enter te eport maret ater 992 new eporters are in between 2 times bigger tan never eporters. In addition, irms tat eport in 992 ave a 0.37 log points iger level o spending in tecnology per worer and are 6.5 times more sill intensive tan irms tat would never eport, wile new eporters are not signiicantly more tecnology or sill intensive tan never eporters in 992. In contrast, ater liberalization tese new eporters become more sill and tecnology-intensive tan irms tat do not eport, increasing teir spending in tecnology per worer 0.34 log points aster. Interestingly, irms tat were already eporting in 992 also increase spending in tecnology 0.27 log points aster tan never eporters. Te patterns in te data described above sow tat tere is a coincidence between entry in te eport maret and tecnology upgrading, but can t establis weter it is epanded eport opportunities tat cause tecnology adoption or viceversa, or weter bot are caused by a tird actor. As te results described above are based on comparisons o eporters and non eporters witin industries, tey are robust to 32

33 macroeconomic socs tat aect all irms equally an eample could be ecange rate appreciation or to socs tat aect all irms witin an industry an eample could be ast tecnological cange in a particular industry. Still, te act tat witin eac sector eporters and new eporters are upgrading tecnology aster tan oter irms could relect oter socs tat aect middle and ig productivity irms dierentially. One eample could be capital account liberalization tat could acilitate access to credit to inance tecnology upgrading and entry in oreign marets or middle and big irms but not to small irms. Ten, te net step in te empirical analysis attempts to establis causality between eporting and tecnology adoption, by lining tese outcomes directly to te reduction in Brazil s taris or imports rom Argentina. 4.2 Te Impact o te reduction in Brazil s taris Empirical identiication o te eect o te all in variable eport costs on entry in te eport maret and tecnology upgrading by Argentinean irms will be based on variation in te cange in Brazilian import taris across 4-digit-SIC Industries. As te tari reductions were programmed in 99, and reac a level o zero or all industries 9 in 995 te source o variation is te initial tari levels in Brazil, tus te cange in taris can t be driven by political pressures arising rom te eects o liberalization in Brazil or Argentina, or te response to socs to industry perormance during tis period. I use te 992 taris o Brazil or imports rom Argentina tat were very similar to taris or imports rom te rest o te world. As in 99 Argentina s sare on Brazil s imports was only 7.7%, and rose only to.2% in 995 wen all taris were eliminated, it is unliely tat Brazil s trade policy was targeted to industry caracteristics particular to Argentina, in te sense tat tey were ig in industries were Argentina ad a comparative advantage. Still, Brazil s tari structure is correlated wit certain industry caracteristics wic could be an important source o bias. I address tis problem in two ways: irst, I include 2-digit-SIC sector trends tat would account or unobserved industry caracteristics at broad sector levels tat could be correlated wit Brazil s taris; second, I include in te regressions controls or some industry caracteristics at te 4-digit-SIC level as te elasticity o demand, capital and sill intensity. 9 Ecept or te automobile and sugar industries. All te results presented in tis section ave been replicated or te sample o irms ecluding tese sectors. 33