Although there is a large volume of empirical work linking trade and industry performance, a clear-cut positive correlation between trade liberalization and productive efficiency is far from established. In Discussion paper No 1301 Simeon Djankov and Research Fellow Bernard Hoekman attempt to consolidate the arguments for the positive effect of trade liberalization on firm performance, using data for Bulgaria for the 1992–4 period. They empirically test the link between trade openness and enterprise restructuring in Bulgaria. The maintained hypothesis in the analysis is that greater export opportunities and increased import competition induces enterprises to restructure. The impact of international trade on three dimensions of enterprise restructuring is investigated: (i) changes in employment by firms; (ii) changes in industry concentration; and (iii) changes in operating profitability. The first focuses on a variable under the control of firm managers; the other two variables are predicted outcomes of restructuring at the level of the firm.

The results suggest that trade liberalization has served as a major force for industrial reform in Bulgarian manufacturing. This is the case for both import competitors and exporters, although it appears that during the 1992–4 period the impact of export opportunities on restructuring was particularly important.