Working Paper: NBER ID: w13297
Authors: Alla Lileeva; Daniel Trefler
Abstract: We weigh into the debate about whether rising productivity is ever a consequence rather than a cause of exporting. Exporting and investing to raise productivity are complimentary activities. For lower-productivity firms, incurring the fixed costs of such investments is justifiable only if accompanied by the larger sales volumes that come with exporting. Lower foreign tariffs will induce these firms to simultaneously export and invest in productivity. In contrast, lower foreign tariffs will induce higher-productivity firms to export without investing, as in Melitz (2003). We model this econometrically using a heterogeneous response model. Unique 'plant-specific' tariff cuts serve as our instrument for the decision of Canadian plants to start exporting to the United States. We find that those lower-productivity Canadian plants that were induced by the tariff cuts to start exporting (a) increased their labor productivity, (b) engaged in more product innovation, and (c) had high adoption rates of advanced manufacturing technologies. These new exporters also increased their domestic (Canadian) market share at the expense of non-exporters, which suggests that the labor productivity gains reflect underlying gains in TFP. In contrast, we find no effects for higher-productivity plants, just as predicted by our complementarity theory.
Keywords: productivity; exporting; tariffs; Canada-US Free Trade Agreement
JEL Codes: F1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| improved access to foreign markets (F10) | plant-level productivity (E23) |
| lower productivity Canadian plants induced to start exporting due to tariff cuts (N12) | significant increases in labor productivity (O49) |
| lower productivity Canadian plants induced to start exporting due to tariff cuts (N12) | total factor productivity (TFP) improvements (O49) |
| tariff cuts (F13) | decision of Canadian plants to commence exporting to the United States (N52) |
| exporting (F10) | productivity gains for lower productivity plants (O49) |
| exporting and investing (F10) | productivity gains (O49) |
| higher productivity firms (D22) | export without investing (F21) |