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Cited by 12,309Global trade and economicsEconomic and Technological InnovationGlobal Trade and Competitiveness

The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity

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Melitz, Marc J.·2003·Econometrica
DOI 10.1111/1468-0262.00467
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Abstract

This Paper builds a dynamic industry model with heterogeneous firms that explains why international trade induces reallocations of resources among firms in an industry. The Paper shows how the exposure to trade will induce only the more productive firms to enter the export market (while some less productive firms continue to produce only for the domestic market) and will simultaneously force the least productive firms to exit. It then shows how further increases in the industry’s exposure to trade lead to additional inter-firm reallocations towards more productive firms. These phenomena have been empirically documented but cannot be explained by current general equilibrium trade models, because they rely on a representative firm framework. The Paper also shows how the aggregate industry productivity growth generated by the reallocations contributes to a welfare gain, thus highlighting a benefit from trade that has not been examined theoretically before. The Paper adapts Hopenhayn’s (1992a) dynamic industry model to monopolistic competition in a general equilibrium setting. In so doing, the Paper provides an extension of Krugman’s (1980) trade model that incorporates firm level productivity differences. Firms with different productivity levels coexist in an industry because each firm faces initial uncertainty concerning its productivity before making an irreversible investment to enter the industry. Entry into the export market is also costly, but the firm’s decision to export occurs after it gains knowledge of its productivity.

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  • Trade liberalization can raise productivity by improving factor allocation or by inducing adoption of more advanced technologies.

    “Trade liberalization can increase productivity by inducing a better allocation of production factors or the adoption of more advanced technologies.”

    From Trade Liberalization, Exports, and Technology Upgrading: Evidence on the Impact of MERCOSUR on Argentinian Firms (2011) · cites this paper as Marc Melitz 2003

    Section 9, “The Impact of Trade Liberalization” (page unavailable), says greater exposure to trade raises aggregate productivity by reallocating market shares toward more productive firms. The “Changes in Aggregate Productivity” section mentions innovation as a channel in other models, but our copy does not establish adoption of more advanced technologies as a productivity mechanism in this paper. (LLM, conf=0.86)

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  • In the model, more productive firms earn higher revenues and are therefore the only ones for which paying fixed export entry costs is profitable.

    “In the model, more productive firms make higher revenues and therefore are the only ones that find paying the fixed costs to enter the export market profitable, as in Melitz (2003).”

    From Trade Liberalization, Exports, and Technology Upgrading: Evidence on the Impact of MERCOSUR on Argentinian Firms (2011) · cites this paper as Melitz (2003)

  • Trade integration reallocates market shares toward exporters, which are the most productive firms, raising aggregate productivity.

    “trade integration reallocates market shares towards exporters, the most productive firms, increasing aggregate productivity.”

    From Trade Liberalization, Exports, and Technology Upgrading: Evidence on the Impact of MERCOSUR on Argentinian Firms (2011) · cites this paper as Marc Melitz 2003

  • The estimated scale elasticities are below the inverse of the trade elasticity in all sectors, implying that they are weaker than those implicitly assumed in trade models with monopolistic competition à la Krugman (1980) or Melitz (2003).

    “Interestingly, the previous numbers are below the inverse of the trade elasticity in all sectors, implying that our estimated scale elasticities are weaker than those implicitly assumed in trade models with monopolistic competition à la Krugman (1980) or Melitz (2003).”

    From The Textbook Case for Industrial Policy: Theory Meets Data (2019) · cites this paper as Melitz (2003)

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Cites

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Research works printed but not linked: 17

  1. Aw, Bee Yan, Sukkyun Chung and Mark J Roberts. 2000. "Productivity and Turnover in the Export Market: Micro-level Evidence from the Republic of Korea and Taiwan (China)." World Bank Economic Review 14:65-90.
  2. Bernard, Andrew B and J Bradford Jensen. 1999a. "Exceptional Exporter Performance: Cause, Effect, or Both?" Journal of International Economics 47:1-25.
  3. Clerides, Sofronis K, Saul Lach and James R. Tybout. 1998. "Is Learning by Exporting Important? Micro-dynamic Evidence from Colombia, Mexico, and Morocco." The Quarterly Journal of Economics 113:903-47.
  4. Davis, Stephen and John Haltiwanger. 1999. Gross Job Flows. In Handbook of Labor Economics: Voume 3B, ed. Orley Ashenfelter and David Card. North Holland pp. 2711-2805.
  5. Dixit, Avinash and Joseph Stiglitz. 1977. "Monopolistic Competition and Optimum Product Di- versity." American Economic Review 67:297-308.
  6. Feldman, Mark and Chirstian Gilles. 1985. "An Expository Note on Individual Risk without Aggregate Uncertainty." Journal of Economic Theory 35:26-32.
  7. Haltiwanger, John. 1997. "Measuring and Analyzing Aggregate Fluctuations: The Importance of Building from Microeconomic Evidence." Federal Reserve Bank of St. Louis Economic Review pp. 55-77.
  8. Hopenhayn, Hugo. 1992b. "Exit, Selection, and the Value of Firms." Journal of Economic Dynamics and Control 16:621-653.
  9. Krugman, Paul. 1979. "Increasing Returns, Monopolistic Competition, and International Trade." Journal of International Economics 9:469-479.
  10. Krugman, Paul. 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade." American Economic Review 70:950-959.
  11. Levinsohn, James. 1999. "Employment Responses to International Liberalization in Chile." Journal of International Economics 47:321-44.
  12. Montagna, Catia. 1995. "Monopolistic Competition with Firm-SpeciÞc Costs." Oxford Economic Papers 47:318-28.
  13. Pavcnik, Nina. 2002. "Trade Liberalization, Exit, and Productivity Improvements: Evidence from Chilean Plants." The Review of Economic Studies 69:245-276.
  14. Roberts, Mark J and James R Tybout. 1997a. "The Decision to Export in Colombia: An Empirical Model of Entry with Sunk Costs." American Economic Review 87:545-64.
  15. Roberts, Mark and James Tybout, eds. 1996. Industrial Evolution in Developing Countries. Oxford University Press.
  16. Tybout, James R. 2002. Plant and Firm-Level Evidence on New Trade Theories. In Handbook of International Economics, ed. James Harrigan. Vol. 38 Basil-Blackwell.
  17. Tybout, James R. and Daniel Westbrook. 1995. "Trade Liberalization and the Dimensions of Efficiency Change in Mexican Manufacturing Industries." Journal of International Economics 39:53-78.

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Authors
Melitz, M. J.
Affiliations
Harvard University (US)
Corresponding author
Melitz, Marc J.
Venue
Econometrica
Publisher
The Econometric Society
Published
2003-11
Volume
71
Issue
6
Pages
1695-1725
ISSN
  • 0012-9682 (ISSN-L)
  • 1468-0262
DOI
10.1111/1468-0262.00467
OpenAlex
W3023875755
Cited by
12,309
References
0
Citations by year
2026: 653 · 2025: 685 · 2024: 662 · 2023: 641 · 2022: 639 · 2021: 670 · 2020: 551 · 2019: 579 · 2018: 609 · 2017: 599 · 2016: 611 · 2015: 709 · 2014: 759 · 2013: 683 · 2012: 641
FWCI
234.95
Type
journal article
Language
en
Open access
Licence
doi.wiley.com/10.1002/tdm_license_1.1 (tdm, 4322 d)
Locations
  • Econometrica (publishedVersion)
  • RePEc: Research Papers in Economics (submittedVersion)
Topics
  • Social Sciences › Economics, Econometrics and Finance › General Economics, Econometrics and Finance › Global trade and economics
  • Social Sciences › Economics, Econometrics and Finance › Economics and Econometrics › Economic and Technological Innovation
  • Social Sciences › Business, Management and Accounting › Strategy and Management › Global Trade and Competitiveness
Keywords
aggregate productivity growth, heterogeneous firms, international trade, export market entry, firm exit, monopolistic competition, welfare gains from trade, irreversible investment

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