DP8256 Export growth and factor market competition: theory and evidence

Author(s): Julian Emami Namini, Giovanni Facchini, Ricardo Lopez
Publication Date: February 2011
Keyword(s): Chile, Firm dynamics, Firm heterogeneity in factor shares, Manufacturing industry, Two-factor trade model
JEL(s): F12, F14, F16, L11
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8256

Empirical evidence suggests that sectoral export growth decreases exporters' survival probability, whereas non--exporters are unaffected. Models with firm heterogeneity in total factor productivity predict the opposite. To solve this puzzle, we develop a two--factor framework where firms differ in factor shares. In this model, export growth increases competition for the factor used intensively by exporters, eliminating some of them, while non--exporters benefit. Our empirical analysis shows that the forces highlighted in the model drive the firm selection experienced by the Chilean manufacturing sector, suggesting that heterogeneity in factor shares is crucial to understand how firms react to trade liberalization.