Firms and Trade in the Global Economy

Transcription

1 I.S.E.O. Summer School, 20 th June 2017 Firms and Trade in the Global Economy Dimitra Petropoulou University of Surrey

2 Lecture Roadmap 1. A (very) brief history of trade theory 2. Key facts about firms and trade: what do we know? 3. Rationalizing the stylized facts: the heterogeneous firms and trade literature; highlights and ongoing research 4. Implications for the effects of Brexit? 2

3 1. A (very) brief history of trade theory The international trade literature addresses four key questions: 1. Why do countries trade? Why do firms engage in importing/exporting (or not)? 2. What determines the pattern of trade? Which firms trade which goods with which countries? 3. What are the effects of international trade on welfare? Cross-sectoral and Intra-sectoral reallocations? 4. How should we formulate trade policy? Effects of trade liberalisation; political economy of trade policy 3

4 1. A (very) brief history of trade theory Classical Trade Theory: Trade based on comparative advantage (opportunity cost differences) Explains inter-industry trade flows between different countries Basis for trade is cross-country differences in: Productivity (Ricardian model; 19 th Century) Factor abundance and cross-sectoral differences in factor intensity (Heckscher-Ohlin model; 1930s) Many extensions (Specific Factors model, HOV etc) Overall gains from trade from specialisation and exchange Inter-sectoral reallocation arises from trade liberalisation, as CA sectors tend to expand, while non-ca sectors shrink Winners and losers from trade Firms? Not the focus identical with CRS, perfect competition 4

5 1. A (very) brief history of trade theory New Trade Theory: Trade based on increasing returns to scale and love for product variety by consumers Explains intra-industry trade flows between similar countries Key models: Krugman (1979, 1980) Helpman and Krugman (1985) Gains from trade through (no losers): Increase in product variety Lower prices (in 1979 model; competition effect) Firms? Identical all trade and make zero profit in equilibrium.limited focus on the firms that actually drive trade flows. 5

6 1. A (very) brief history of trade theory New New Trade Theory : Mid-1990s and 2000s: many empirical studies based on firm-level micro datasets that track production and trade Stylised facts about firms and trade emerge Theoretical literature pioneered by Melitz (2003) Labour productivity differs across firms; fixed cost of exporting Research in trade research changed dramatically over the past 15 years Multiproduct firms; selection into innovation, FDI etc; firm dynamics. Effects from trade liberalisation? Intra-sectoral reallocation of labour to more efficient firms as more productive firms expand and least productive firms exit Aggregate industry productivity growth A pro-competitive effect through lower markups (in some models) Shift in focus from industries and countries to firms and products. 6

7 2. Key facts about firms and trade Fact 1: Firm exporting is a rare event Of the 5.5 million firms operating in the US in 2000, just 4% engaged in exporting (Bernard et al., 2007a) In industries predisposed to exporting 15% were exporters. Substantial variation across industries so is importing Importing even rarer than exporting.again with substantial variation across industries. The shares of exporting and importing firms are significantly positively correlated (0.87) across industries. 41% of exporters also import; 79% of importers also export. Similar patterns found in microdata from other countries 7

8 Bernard et al., 2007a 8

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10 2. Key facts about firms and trade Bernard et al (2003) Approximately 200,000 plants in the Census Low export participation and low export intensity. yet 14% of gross U.S. manufacturing production was exported. How can we reconcile this? Key explanation: exporting plants are much bigger, shipping on average 5.6 times more than non-exporters. Even excluding exports, plants that export ship 4.8 times as much to the U.S. market than their non-exporting counterparts. 10

11 2. Key facts about firms and trade Fact 2: Exporting firms are different from non-exporters (within the same disaggregated industry) Exporters are 97% larger in employment Exporters are 108% larger in shipments, Exporters are more productive by 11% for value added per worker and 3% for total factor productivity Exporters pay higher wages by approximately 6%. Exporters are relatively more capital- and skill-intensive than non-exporters by approximately 12% and 11%, respectively. Qualitatively similar results have been found for many other countries and time periods (including developing countries) 11

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14 2. Key facts about firms and trade Causality? Does high productivity induce firms to self-select into export markets or does exporting cause productivity growth through learning by exporting? Evidence for many industries and countries confirms that high productivity precedes entry into export markets. Suggestive of sunk costs of entry into export markets Only the most productive firms find it profitable to incur this (Roberts & Tybout, 1997) Early studies found no evidence of learning by exporting; some studies find evidence of productivity improvements following export, but overall the evidence is not compelling 14

15 2. Key facts about firms and trade Fact 3: Strong evidence of compositional effects across firms (within sectors) There is a lot of firm entry, exit and market reallocation through job creation and job destruction 1/3 of US manufacturing plants enter and exit every five years. Exitors are smaller on average than incumbents (Dunne et al, 1989) Evidence of Darwinian selection across plants/firms 15

16 Bernard and Jensen (2004) 16

17 2. Key facts about firms and trade Fact 4: Trade Liberalisation raises aggregate industry productivity Two-thirds of the 19% increase in aggregate productivity following Chile's trade liberalization of the late 1970s/1980s due to the relatively greater survival and growth of highproductivity plants (Pavcnik, 2002) Many studies of trade liberalization reforms find similar results (Trefler, 2004; Bernard, Jensen and Schott, 2006a) Within-industry reallocation of resources/employment found to dominate across-industry reallocations of resources/employment emphasised by comparative advantage models. Simultaneous within-industry job creation and destruction. 17

18 2. Key facts about firms and trade Fact 5: Trade is highly concentrated In 2000, the top 1% of trading firms by value (sum of imports plus exports) accounted for over 80% of the value of total trade, while the top 10 percent of trading firms accounted for over 95%. The employment shares of the top 1% and 10% of trading firms were 14% and 24% respectively Fact 6: Firms export multiple products to multiple destinations In 2000, firms that export more than one (10 digit) product comprise 58% of exporting firms and account for more than 99% of export value. Evidence of superstar firms 18

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21 2. Key facts about firms and trade Fact 7: Firm export dynamics Eaton et al. (2008) Colombian data for Each year nearly ½ of all Colombian exporters were not exporters in the previous year New exporters are small and most do not continue exporting in the following year. Total exports are instead dominated by a small number of large and stable exporters. A fraction of new firms rapidly expand exports, and in less than a decade account for almost ½ of total export growth. Firms typically begin exporting in a single foreign market and, if they survive, gradually expand into additional destinations. 21

22 3. Rationalising the stylised facts Trade theory has come a long way towards explaining these facts (and new facts continue to emerge!) Theory progresses hand in hand with empirical work Today I will explore Melitz (2003) in some (non-technical) detail and then give you a flavour of subsequent contributions and projects I ve been involved in: Helpman, Melitz and Yeaple (2004) Exports vs FDI Melitz and Ottaviano (2008) Market size, trade and productivity Di Ubaldo (2016) From innovation to exporting during the crisis Albornoz et al (2012) Sequential exporting Tong (2016) Sequential exporting across products Tong (2017) Experimentation speed across products 22

23 3. Melitz (2013) 23

24 3. Melitz (2013) 24

25 3. Melitz (2013) 25

26 3. Endogenous exit 26

27 Autarky: Profits from domestic sales Exit Produce (for domestic market) 27

28 3. Opening to trade 28

29 Free trade: Profits from domestic sales and exports Exit Domestic Export 29

30 Least productive exporters worse off than under autarky Free Trade Only very best firms better off under free trade Autarky Least productive firms die Most productive firms export and grow 30

31 3. Melitz (2003) implications of trade 31

32 3. Melitz (2003) implications of trade 3. Dispersion of profits rises with trade Domestic profits decline for all firms through foreign competition For sufficiently productive firms, exporting is a source of profit For a range of firms, export profits are insufficient to compensate for the loss of domestic profits For highly productive firms, the extra export profits more than compensate the loss of domestic profits Hence, some firms lose and others gain from free trade. 32

33 3. Helpman, Melitz and Yeaple (2004) Firms can serve foreign buyers through a variety of channels: this paper focuses on the choice between exports and horizontal FDI Every firm decides whether to serve a foreign market, and whether to do so through exports or local subsidiary sales. Exporting involves lower fixed costs while FDI involves lower variable costs. Hence only the most productive firms engage in FDI. Testing using US exports and affiliate sales covering 52 sectors and 38 countries supports the model. MNEs are 15% more productive relative to non-mne exporters (controlling for capital intensity and industry effects) 33

34 Profits from domestic sales, exports and from FDI Exit Domestic Export FDI 34

35 3. Melitz and Ottaviano (2008) One limitation of Melitz (2003) is its assumption of CES preferences, which imply constant mark-ups over marginal cost also that changes in aggregate demand leave the productivity cutoff for production unchanged (more/less varieties but prices unchanged) There is, however, evidence that mark-ups are variable. Melitz and Ottaviano (2008) assume consumer preferences are quasilinear between a homogeneous and a differentiated sector, with quadratic preferences across varieties within the differentiated sector (linear demand for each variety; hence elasticity and the mark up varies) 35

36 3. Melitz and Ottaviano (2008) In Melitz and Ottaviano (2008), market size reflects the toughness of competition. Tougher competition in a market is characterized by a larger number of sellers and a lower average price of sellers, which lowers mark-ups across firms. Differences in competition across markets then influence firm location and export decisions. Larger markets are characterized in equilibrium by tougher competition, which implies that it is harder for exporters to break into these markets and harder for domestic firms to survive in these markets. 36

37 3. Di Ubaldo (2016) 37

38 3. Di Ubaldo (2016) Inspired by the 2008 financial crisis, during which we saw (a) a reduction in external liquidity made available by the banking sector, and (b) cuts in innovation spending The key contribution of the paper is to show that a liquidity shock that constrains innovation can stimulate selection into exporting Key mechanism: tighter credit constraint interrupts innovation activity for some firms; hence product market competition weakens in the market, causing firms to export that would otherwise have been unable to also to survive in the market where they would otherwise have been unable to. average productivity falls. 38

39 3. Di Ubaldo (2016) credit shock Innovator exporters Innovator nonexporters Non-innovators non-exporters 39

40 3. Albornoz et al (2012) Sequential exporting Builds a model to explain firm dynamics (fact 7): Firms incur substantial sunk costs to break into foreign markets yet many give up exporting shortly after their first experience, which typically involves very small sales. At the same time, some new exporters rapidly expand exports, and then expand into additional destinations. What could be going on? Evidence of experimentation? 40

41 3. Albornoz et al (2012) Sequential exporting Main mechanism of their model: A firm discovers its export profitability only after actually engaging in exporting. Two markets: A and B; lower trade costs for A; profitability is positively correlated over time and across destinations. Can be optimal to export a small amount to A (experimentation); once the firm learns how good it is, it adjusts quantities and decides whether to exit or also supply market B. The possibility of profitable expansion at both the intensive and extensive margins makes incurring the sunk entry cost worthwhile despite the high failure rate. Empirical support for mechanism found using a census of Argentinean firm-level manufacturing exports from 2002 to

42 3. Tong (2016) sequential exporting across products Builds on Alboroz et al (2012) but explores sequential exporting by firms products in one destination Predictions tested using a rich dataset of Peruvian firms that exported to the United States between 2006 and Firms with one year experience exporting a given product to US grow more at the intensive and extensive margin than more experienced firms. they are also more prone to stop exporting the product. Tariff elimination from the USA-Peru Free Trade associated an increase in the entry likelihood with a new product to USA, and a reduction of the exit probability for new exporters. New small firms tend to grow more at the intensive margin with a non-core competence product; but progress more at the extensive margin and are less likely to exit with a core product. Tong (2017) exploring speed of experimentation and trade liberalisation 42

43 4. Firm dynamics and productivity: effects of Brexit? June 23 rd 2016: the UK voted to leave the European Union (EU) after membership since This shock result resulted in sterling depreciating against the dollar by 17% relative to the eve of the referendum. March 29 th 2017: the UK formally notified the EU of its intention to withdraw from the EU under Article 50 of the Lisbon Treaty, triggering the start of a two year window for the UK to negotiate the terms of withdrawal. Trade economists around the world warned of the high costs of such a departure but the rhetoric of the Leave campaign was anti expert Soft Brexit (continues to be part of the Single Market) vs Hard Brexit (trades under WTO rules like the US or Japan) 43

44 4. Firm dynamics and productivity: effects of Brexit? Two key issues were (a) migration, and (b) fiscal transfers to the EU Since a single market would mean accepting (a) and (b), hard Brexit is looking more likely What are the likely effects? Dhingra et al (2017) simulate a range of counterfactuals reflecting alternative options for EU-UK relations following Brexit (following Costinot and Rodríguez-Clare, 2014). Welfare losses for average UK household are 1.3% with soft Brexit Welfare losses rise to 2.7% with hard Brexit. Incorporating dynamic results in a decline in average income per capita of between 6.3% and 9.4%, partly due to a fall in FDI. These negative effects are widely shared across the entire income distribution and are unlikely to be offset from new trade deals. 44

45 Further reading Bernard, Andrew B., Jonathan Eaton, J. Bradford Jensen, and Samuel Kortum (2003), "Plants and productivity in international trade." The American Economic Review, 93 (4), Bernard, Andrew. B., J. Bradford Jensen, Stephen. J. Redding and Peter. K. Schott (2007), "Firms in International Trade," Journal of Economic Perspectives, 21(3), Bernard, Andrew B., J. Bradford Jensen, Stephen J. Redding, and Peter K. Schott, (2012), "The empirics of firm heterogeneity and international trade." Annual Review of Econonomics. 4(1), Melitz, Marc J, and Stephen J Redding, (2014), Heterogeneous Firms and Trade. Handbook of International Economics, 4th ed, 4: Elsevier, 4, Melitz, Marc J. (2003), "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity", Econometrica, 71 (6), Helpman, Elhanan, Marc J. Melitz and Stephen Yeaple (2004), "Export versus FDI with Heterogeneous Firms", The American Economic Review, 94(1), Melitz M J and D Trefler (2012) "Gains from trade when firms matter", Journal of Economic Perspectives, 26(2): Albornoz, F., Calvo Pardo, H. F., Corcos, G., & Ornelas, E. (2012), Sequential exporting, Journal of International Economics, 88(1), Dhingra, Swati, Hanwei Huang, Gianmarco Ottaviano (2017), The Costs and Benefits of Leaving the EU: Trade Effects, CEP Discussion Paper No 1478, April 2017 Barnard, C., Johnson, P., Mitchell, I., Dhingra, S., Ottaviano, G., Sampson, T., Portes, J., Forte, G., Sumption, M., Armour, J. and Vickers, J.,(2017) Economic Consequences of Brexit. Oxford Review of Economic Policy,