Firms in International Trade

Firms in International Trade
(with an Application to Spain)
Pol Antràs Puchal (Harvard University)
Rubén Segura-Cayuela (Banco de España)
with
Diego Rodríguez Rodríguez (U.
(U Complutense)
December 2010
SERIES Invited Lecture
1
Overview
O
i off R
Recent
Developments
2
Neoclassical Trade Theory

Firms are treated as a black box (supply side =
production set)



Often assume constant
Oft
t t returns
t
to
t scale,
l so firm
fi size
i is
i
indeterminate
General equilibrium only pins down the size of the
sector or industry to which the firm belongs
Very powerful theory, but of limited use when studying
firm-level issues in international trade
December 2010
SERIES Invited Lecture
3
New Trade Theory


Introduced increasing returns, imperfect competition
and product differentiation
Thi helped
This
h l d resolve
l the
h indeterminacy
i d
i
off firm
fi size
i



With product differentiation, firms face downward sloping
demand curves and there exists an optimal firm size
Free entry (and general equilibrium) then pins down
industry size and also the number of firms within an
industry
New Trade Theoryy rationalized two-wayy trade flows in
similar products across countries
December 2010
SERIES Invited Lecture
4
Some Problematic Predictions




As insightful as New Trade Theory is, it delivers
some counterfactual predictions
B
Because
all
ll firms
fi
within
i hi a sector are treatedd
symmetrically, either all firms within an industry
export or none does (and they always do with CES)
Trade liberalization generally affects all firms within
an industry symmetrically (and when it doesn
doesn’tt,
there is no way to predict these asymmetries)
These predictions are problematic because they do
not provide a good description of reality
December 2010
SERIES Invited Lecture
5
“Evidence”

“There is no good reason to believe that the
assumptions of the Dixit-Stiglitz model – a
continuum of goods that enter symmetrically into
demand, with the same cost functions, and with the
elasticity of substitution between any two goods both
constant and the same for any pair you choose – are
remotely true in reality.”
December 2010
SERIES Invited Lecture
6
“Evidence”

“There is no good reason to believe that the
assumptions of the Dixit-Stiglitz model – a
continuum of goods that enter symmetrically into
demand, with the same cost functions, and with the
elasticity of substitution between any two goods both
constant and the same for any pair you choose – are
remotely true in reality.”

Paul Krugman,
g
Nobel Lecture 2008
December 2010
SERIES Invited Lecture
7
Real Evidence: Heterogeneity in Data

Standard deviation of log sales

Productivity: Standard deviation of log value added
per worker for U.S. plants:


Overall: 0.75
Within 4-digit sectors (450 sectors): 0.66
December 2010
SERIES Invited Lecture
8
Exporters are in the Minority
December 2010
SERIES Invited Lecture
9
Exporters in the U.S. (4-digit)
December 2010
SERIES Invited Lecture
10
Exporters Are Different than Non-Exporters
December 2010
SERIES Invited Lecture
11
Exporters Are Different than Non-Exporters
December 2010
SERIES Invited Lecture
12
Interpreting the Evidence


An obvious question at this point is: Do differences
in performance generate selection into exporting, or
does exporting generate differences in performance?
Not straightforward to tease out empirically:


One can look at the timing of productivity changes and
exporting (does exporting lag productivity improvements
or vice versa)
But notice that firms can select into exporting because
they anticipate that their productivity is in an upward
trend (Costantini and Melitz,
Melitz 2008)
December 2010
SERIES Invited Lecture
13
Empirical Tests

Strong evidence for self-selection of more
productive firms into exporting




Colombia,
C
l bi Mexico,
M i andd Morocco:
M
Clerides,
Cl id Lach,
L h andd
Tybout (1998, QJE)
U.S.: Bernard and Jensen ((1999,, JIE))
Taiwan: Aw, Chen, and Roberts (2001, JDE)
Mixed evidence for “learning-by-exporting”
g y p
g

Some evidence in growing, developing countries (India,
Slovenia) – see De Loecker (2007, JIE)
December 2010
SERIES Invited Lecture
14
Caveats


Exogenous causality from either export status or
productivity is suspect
N evidence
New
id
shows
h
that
h fi
firms make
k joint
j i t decisions
d ii
concerning both export status and technology choice:



Verhoogen (2009
(2009, QJE): quality upgrade and exports in
Mexico
Bustos ((2010, AER):
) new exporters
p
in Argentina
g
spend
p
more on technological upgrades
Lileeva and Trefler (2010, QJE): similar for Canada
December 2010
SERIES Invited Lecture
15
Effects of Trade Liberalization




There is now mounting evidence that trade
liberalization induces important reallocation effects
E
Exporters
expand,
d non-exporters contract, andd this
hi
raises industry productivity
Chil trade
Chile:
t d liberalization
lib li ti in
i 1979-85
1979 85 lledd to
t 19%
productivity increase (of which 2/3 is explained by
reallocation effects)
Similarly for Canadian firms after U.S.-Canada free
trade agreement (Trefler, 2004)
December 2010
SERIES Invited Lecture
16
Plant Death and Exporting

Bernard and Jensen (ReStat, 2007):



Unconditionally, they find that in the U.S. export status is
associated with 12
12.6%
6% reduction in probability of death
(this is large, overall probability is 27%).
Is it jjust that low-productivity
p
y firms are more likelyy to
die and these tend to be non-exporters?
No. Conditional on a full set of industryy and firm
controls (productivity, size, capital-labor ratio, ...),
export status is still associated with a significant 5-6%
reduction
d i in
i probability
b bili off death
d h
December 2010
SERIES Invited Lecture
17
Why Do We See These Effects?

“It is a capital mistake to theorize before one has all
the evidence. Insensibly one begins to twist facts to
suit theories
theories, instead of theories to suit facts
facts”
December 2010
SERIES Invited Lecture
19
Why Do We See These Effects?

“It is a capital mistake to theorize before one has all
the evidence. Insensibly one begins to twist facts to
suit theories
theories, instead of theories to suit facts
facts”

Sherlock Holmes (1891)
December 2010
SERIES Invited Lecture
19
Towards Succesful Theories

1.
2.
Evidence suggests that successful theoretical
frameworks for studying firms and the decision to
export should include two features:
Within sectoral heterogeneity in size and
productivity
A feature that leads only the most productive firms
to engage in foreign trade:


fixed cost of exporting (Melitz, 2003)
variable markups
p (BEJK,
(
, 2002,, Melitz and Ottaviano,,
2008)
December 2010
SERIES Invited Lecture
20
Melitz (2003)







Eachh firm
E
fi produces
d
its
it own “variety”
“ i t ” off a goodd (CES)
Developing this variety entails a sunk entry cost
Following entry
entry, firms observe their productivity
Prior to entry, only distribution of potential productivity
levels is known (common for all firms)
Firms also face a fixed overhead production cost
Exporting
p
g involves both a standard “per-unit”
p
trade cost
as well as a fixed export cost
An entering firm decides whether to produce (or exit)
and then whether to export (or only serve home market)
December 2010
SERIES Invited Lecture
21
Melitz (2003): Equilibrium
December 2010
SERIES Invited Lecture
22
Melitz (2003): Equilibrium
December 2010
SERIES Invited Lecture
23
Melitz (2003): Reallocation Effects
December 2010
SERIES Invited Lecture
24
Trade Liberalization


Forces least productive firms to exit (competitive
pressure)
R ll
Re-allocates
market
k shares
h
towards
d more productive
d i
firms


Resulting in higher average productivity
Welfare gains: combination of higher average
productivity and ambiguous effect of product variety

But quantitatively, not clear there are additional gains from
trade given certain observable variables (Arkolakis et al.,
2010)
December 2010
SERIES Invited Lecture
25
Aggregate Implications



Melitz (2003) model is successful in accounting for
several micro facts in the data
M
More
iimportantly,
l this
hi micro-founded
i
f
d d model
d l off
industry equilibrium has generated important new
insights for the aggregate response of exports to
shocks
The increase in aggregate productivity is just one
example, but many others have been highlighted
December 2010
SERIES Invited Lecture
26
Chaney (2007)

Develops multi-sector, multi-country Melitz model
with Pareto distribution of productivity
Sh
Shows
that
h model
d l predicts
di modified
difi d gravity
i equation
i
Standard gravity

Gravity with heterogeneous firms


December 2010
SERIES Invited Lecture
27
Chaney (2007)



A larger  denotes a smaller right-tail of the Pareto
distribution
Thus, the elasticity of trade flows to changes in trade
frictions is a function of characteristics of the size
distribution of firms
This elasticity is lower in sectors/countries with high
dispersion in firm size (Key: extensive margin)
December 2010
SERIES Invited Lecture
28
Helpman, Melitz & Rubinstein (08)




Also demonstrate that firm-level models of
exporting can have important implications for
aggregate bilateral trade flows
In particular, they can easily explain the large
number of zeros observed in these flows
Similar to Chaney (2007) but they develop an
econometric approach for estimating trade flows
Is being widely used in several applications
December 2010
SERIES Invited Lecture
29
Helpman, Melitz & Rubinstein (08)
Trade in both directions
Trade in one direction only
No trade
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
December 2010
SERIES Invited Lecture
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
19
78
19
76
19
74
19
72
19
70
0%
30
Di Giovanni & Levchenko (2010)


They note that if the slope of the Pareto distribution
is close to 1, then aggregate exports closely track
those of the largest firms in an economy
Implication: if productivity or costs evolve
differently for large and small firms,
firms the evolution of
large firms may be particularly relevant


Simple
p pprice indices might
g not capture
p
this correctlyy
They estimate the slope for several countries and
find an estimate veryy close to 1 in most countries
December 2010
SERIES Invited Lecture
31
Policy Implications


Interesting question: conditional on some average
level of productivity, is there a socially optimal size
distribution of firms?
Still very underdeveloped area – results seem very
model specific
December 2010
SERIES Invited Lecture
32
An Application to Spain
33
Road Map




Can these new approaches shed light on the behavior
of aggregate Spanish exports during the 2000s?
W will
We
ill argue that
h this
hi behavior
b h i is
i puzzling
li from
f
the
h
point of view of homogenous firms models
A more micro-founded
i
f
d d investigation
i
ti ti provides
id new
insights that bring us closer to explaining the puzzle
Still we will see that the stylized models developed
Still,
so far are too basic to account for all the patterns we
observe
December 2010
SERIES Invited Lecture
34
Puzzle: Competitiveness Falls…
December 2010
SERIES Invited Lecture
35
Puzzle: Competitiveness Falls…
December 2010
SERIES Invited Lecture
36
The Puzzle: but Market Share is Flat
December 2010
SERIES Invited Lecture
37
The Puzzle: but Market Share is Flat
December 2010
SERIES Invited Lecture
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Market Share is Flat in Most Sectors
December 2010
SERIES Invited Lecture
39
Puzzle: Homogenous Firm Models

Relative exports should be decreasing in relative
export prices (and, in turn, in relative costs)






SPAIN
SPAIN
X SPAIN
DSPAIN
P
C
X
X
X

OTHER
OTHER
X OTHER D OTHER
P
C
X
X
X

With CES preferences, this looks
SPAIN
SPAIN
X
OTHER
X
X
ψ

OTHER
X
ψ
C
 
C
SPAIN
X
OTHER
X




OTHER
/
ψ
where ψSPAIN
is a relative demand shifter
X
X
December 2010
SERIES Invited Lecture
40
Explanations for Puzzle
1.
Relative Demand Shifts
a.
b.
2.
Relative Supply Shifts
a.
b.
3
3.
Increase in relative quality of Spanish exports
Hi h iincome growth
Higher
th in
i predominant
d i t Spanish
S i h importers
i
t
Effects
Eff
t off heterogeneity
h t
it
Markup adjustment (though relative prices are going up)
Capital Flows,
Flows FDI,
FDI and Current Account Dynamics
We will focus on 2.a.,
2 a but will say a word about the others
December 2010
SERIES Invited Lecture
41
Heterogeneity
H
i in
i Spanish
S ih
Exporters
42
Spanish Exporters Also Perform Better
l X it     D expit   Ind
ln
I dit  Year
Y it   Si
Sizeit   it
Exporting Premia
Source: ESEE
Dependent Variable (X):
All firms Output Employment Capital per worker
l
k
Capital per hour Results: Wage per worker
Output per worker Output per hour
Output per hour
N. of observations 0.479 (33.74) 0.086
(14.9) 0,253
(18,2) 0,255 (17,9) 0.106
(18.91) 0.385 (30.53) 0.386
(30.61) 17,740 Firms with 200 or fewer workers
fewer workers
1.233 (57.47) 0.692 (44.66) 0,496 (32,7) 0,503 (32,5) 0.190 (32.37) 0.536 (43.41) 0.539
0.539 (43.66) 12,589 Firms with more than 200 workers
than 200
0.222 (4.26) 0.195
(6.00) 0,122
(3,6) 0,118 (3,4) 0.035
(2.26) 0.022 (0.56) 0.022
(0.57) 5,151 December 2010
SERIES Invited Lecture
43
But There is Substantial Heterogeneity
Source: ESEE
December 2010
SERIES Invited Lecture
44
In 2000s, Large Exporters Grew More
Source: ESEE
December 2010
SERIES Invited Lecture
45
In 2000s, Large Exporters Grew More
Source: ESEE
December 2010
SERIES Invited Lecture
46
In 2000s, Large Exporters Grew More
Source: ESEE
December 2010
SERIES Invited Lecture
47
Why This Differential Growth?
Source: ESEE
December 2010
SERIES Invited Lecture
48
Why This Differential Growth?
Source: ESEE
December 2010
SERIES Invited Lecture
49
Why Might This Affect Aggregate Exports?
December 2010
SERIES Invited Lecture
50
Is This Sufficient to Explain the Puzzle?





No!
We are not saying anything quantitative at this point
More importantly, what matters is relative
competitiveness
What if large firms in other countries are seeing their
competitiveness rise by even more?
F this
For
hi we needd firm-level
fi l l data
d from
f
other
h countries
i


Homogenized dataset available in a few weeks
Next: preliminary evidence from OECD and Amadeus
December 2010
SERIES Invited Lecture
51
Relative Competitiveness
December 2010
SERIES Invited Lecture
52
Change in Relative Competitiveness
Source: Amadeus
December 2010
SERIES Invited Lecture
53
Recap



We observe heterogeneous performance of Spanish
exporters
Gi
Given
thickness
hi k
off right-tail,
i h il these
h
changes
h
in
i
relative competitiveness have potential to explain
aggregate export behavior
But: why are price indices not capturing this?

Weighting does not seem to appropriately take into
account for intraindustry heterogeneity
December 2010
SERIES Invited Lecture
54
S
Some
N
Notes on Al
Alternative
i
Explanations
55
A Relative Demand Shock?
Sources: WB, ECB,
WTO, and MEH
December 2010
SERIES Invited Lecture
56
A Relative Demand Shock?
Sources: WB, ECB,
WTO, and MEH
December 2010
SERIES Invited Lecture
57
A Markup Adjustment?
Sources: WB, ECB,
WTO, and MEH
December 2010
SERIES Invited Lecture
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A Markup Adjustment?
Sources: WB, ECB,
WTO, and MEH
December 2010
SERIES Invited Lecture
59
A Markup Adjustment?
Source: ESEE
December 2010
SERIES Invited Lecture
60
A Markup Adjustment?
Dependent variable: Growth of Sale Prices Coefficient t-statistic
Growth of Intermediate Input Prices
0.3168
39.81
L
Large
Firms
Fi
0 1514
0.1514
1 90
1.90
S
Source:
ESEE
December 2010
SERIES Invited Lecture
61
“Quality” Improvements?
Sources: WB, ECB,
WTO, and MEH
December 2010
SERIES Invited Lecture
62
Is It Explained by Inward FDI?
Source: ESEE
December 2010
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63
Is It Explained by Inward FDI?
S
Source:
ESEE
December 2010
SERIES Invited Lecture
64
Is It Explained by Outward FDI?
Source: ESEE
December 2010
SERIES Invited Lecture
65
Loose Ends
66
The Non-Monotonicity Around 2003
Sources: WTO and BdE
December 2010
SERIES Invited Lecture
67
Recent Crisis
Ch
Changes
iin L
Labor
b C
Costs and
dP
Productivity
d i i ((percentages))
Firm Size (no. of employees)
200 or less
More than 200
2008 2009
2008 2009
Total Labor Costs
A
Average
T
Total
t l Employment
E l
t
1,9
-5,3
53
-8,7
-9,4
94
3,3
-2,6
26
-7,7
-8,9
89
Real Ouput of Goods and Services
-5,0 -18,0
-8,4
-17,6
Real Value Added
-0,1
-6,1
-8,0
-9,6
Labor cost per worker
Productivity (Output based)
7,6
0,3
0,8
-9,5
6,0
-6,0
1,3
-9,6
Productivity (Value added based)
5,5
3,6
-5,5
5,5
-0,8
0,8
Source: ESEE
December 2010
SERIES Invited Lecture
68
(In)Conclusions
69
(In)Conclusions


Puzzling behavior of aggregate Spanish exports in
light of apparent loss of competitiveness
M d l with
Models
i h firm
fi heterogeneity
h
i appear promising
i i in
i
(partly) explaining this puzzle



Loss of competitiveness not homogenous across firms:
large firms less affected
Other simple explanations appear at odds with
features of the data
Future work: use of new homogenized
g
dataset and
quantification
December 2010
SERIES Invited Lecture
70
(In)Conclusions

“Sorprenderse, extrañarse, es comenzar a entender”
(“To be surprised, to wonder, is to begin to understand.” )

José Ortega y Gasset
December 2010
SERIES Invited Lecture
71