Firms in International Trade

Abstract

For most of its lengthy history the field of international trade largely ignored the role of the firm in mediating the flow of goods and services. Traditional trade theory explained the flow of goods between countries in terms of comparative advantage, that is, a variation in the opportunity costs of production across countries and industries. Even the research focusing on differentiated varieties and increasing returns to scale that followed Helpman and Krugman continued to retain the characterization of the representative firm. (1) However, the assumption of a representative firm, while greatly enhancing the tractability of general equilibrium analysis, is emphatically rejected in the data. My research over the past decade has been an attempt to explore international trade from below: to understand the decisions of heterogeneous firms in shaping international trade and their effects on productivity growth and welfare. Firm Heterogeneity and Trade My early work with J. Bradford Jensen was motivated by a simple question: what do we know about firms that trade? The answer at the time was "very little" and our initial efforts focused on locating firm-level data and describing the world of exporting firms. Our first study compared exporters and non-exporters for the entire U.S. manufacturing sector and established a set of facts about exporting plants and firms. (2) Two major results stand out. First, only a small fraction of firms are exporters at any given time. Even in sectors where the United States is thought to have comparative advantage, such as Instruments, a majority of firms produce only for the domestic market. Similarly, some firms are exporting even in net import sectors such as Textiles and Apparel. Second, exporters are substantially and significantly different than non-exporters, even in the same industry and region. Exporters are dramatically larger, more productive, pay higher wages, use more skilled workers, and are more technology-and capital-intensive than their nonexporting counterparts. In related work on German firms with Joachim Wagner, I again found these patterns of systematic differences between exporters and non-exporters and subsequent research by numerous authors has confirmed them to be robust across a wide range of industries, regions, time periods and countries at varied levels of economic development. (3) Exporting and Productivity The biggest question raised by this early research was the nature of the positive correlation between export status and productivity, that is, whether exporting leads to higher plant productivity. Research done with J. Bradford Jensen established that "potential" exporters have better characteristics years before they enter a foreign market, including higher productivity, higher wages, and larger size. (4) However, the most important finding was that exporters do not have higher productivity growth even though they have higher levels of productivity. Today's exporters have no advantage in terms of productivity growth relative to non-exporters over the next year, and over some horizons actual significantly underperform in terms of productivity growth. As a complementary question, we asked if higher productivity increases the probability of a plant becoming an exporter. Studies on both the U.S. and Germany find evidence for the selection of high productivity firms into exporting as well as evidence of substantial sunk costs to entering the export market. (5) The strong conclusion from this empirical work is that high productivity firms are able to pay the sunk costs of entering foreign markets but that, once in, they do not receive an extra productivity kick. However, the role of productivity in shaping aggregate export responses should not be overstated. Work on the determinants of the U.S. export boom cautioned that improved U.S. productivity still played a minor role relative to exchange rates and foreign income growth in the dramatic expansion of exports in the late 1980s and early 1990s. …