Geneva Trade and Development Workshop 1: Nina Pavcnik on "FDI Inflows and Domestic Firms"

FDI Inflows and Domestic Firms: Adjustments to New Export Opportunities, presented by Nina Pavcnik, Dartmouth College and CEPR, joint with Brian McCaig and Woan Foong Wong.

Paper abstract: We investigate the long-run impacts of trade policy on manufacturing firms in the presence of foreign investment and a large state-owned sector in a low-income country, Vietnam. We find that reductions in U.S. tariffs on imports from Vietnam, as mandated by the 2001 U.S.-Vietnam Bilateral Trade Agreement, caused an immediate surge in Vietnamese exports which flattens out in the medium run but continues to grow. The U.S. tariff reductions are associated with an increase in industry size, as measured by number of firms, employment, and revenue. While the number of foreign and domestic private firms responds immediately, state firms have a delayed response. Within industries, employment shares shift strongly to new entrants in response to tariff cuts. Counter to the predictions of stylized heterogeneous firm trade models, we find that tariff cuts lead to disproportional increases in employment shares of entrants over incumbents. In addition, firm-type matters as tariff cuts favorably impact employment share of foreign firms over private domestic firms, with no net response by state-owned enterprises. The growth in employment share among entrants is predominantly due to foreign entrants.