Productivity Growth, Innovation, and Upgrading along Global Value Chains

Greater exposure to international trade improves productivity by increasing competition, expanding product markets, and improving access to production inputs� Productivity increases at the industry level because competitive pressure leads to a reallocation of resources to more productive firms, while the least productive ones are forced to exit the market (Melitz 2003; Melitz and Ottaviano 2008; Eslava et al� 2013)� The productivity of firms can also increase because heightened competition from imported products pushes them to invest in new processes, technologies, and skills to survive (Shu and Steinwender 2019)� The possibility to expand into larger export markets also incentivizes firms to improve the production efficiency and the quality of their products (Bustos 2011)� And access to a larger range of intermediate production inputs potentially lowers the input costs of firms, improves product quality, and expands product variety (Fieler, Eslava, and Xu 2018; Goldberg et al� 2010; Amiti and Konings 2007)� Indeed, a positive and significant causal effect of trade—measured as the sum of exports plus imports to a country’s gross domestic product—on aggregate productivity has long been established in the economic literature (Alcalá and Ciccone 2004; Alesina, Spolaore, and Wacziarg 2000; Frankel and Romer 1999)�