Publication - Two-way link between trade and productivity
Copyright: European Central Bank
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Introduction - Owing to the increased availability of firm-level data, various empirical studies have documented the existence of a marked heterogeneity in performance across firms. Empirical literature based on granular data shows that firms are very different in terms of e.g. size, cost structure, profits and productivity, even within finely disaggregated sectors.1
This also holds true for EU countries, as is confirmed by a database recently produced by the Competitiveness Research Network (CompNet). 2 In the “old” EU Member States (i.e. the nine countries that had joined the EU by 1995 at the latest, for which data are available), the top 10% most productive firms are, on average, nearly three times more productive than firms located at the bottom 10% of the productivity distribution within each sector (see Chart 1). 3 This figure is even higher for most of the ten “new” EU Member States for which data are available. 4 Moreover, the productivity distribution is asymmetric as it displays a large density of low-productive firms and few highly productive firms. Although this empirical regularity applies to all countries and sectors, the shape of the distribution can differ across countries, reflecting their structural characteristics. For example, the productivity distributions of the manufacturing sector in France and Germany are characterised by a higher mean and fatter right tail than those in countries such as Spain and Italy (see Chart 2).
Firm heterogeneity has implications for the overarching assessment of competitiveness, which covers both trade outcomes and productivity developments. In a broad sense, competitiveness relates to the business environment and institutional framework that allow efficient firms to thrive, 5 thus supporting trade performance and productivity. The existence of a significant degree of heterogeneity across firms has important implications for the assessment of competitiveness along both such dimensions.
Regarding trade performance, both the empirical and the theoretical literature highlight a two-way link between firm-level trade and productivity. In line with empirical evidence based on granular data, the most recent theoretical international trade literature predicts that exporters are the most productive firms in an economy.6 Moreover, in addition to the traditional gains from trade, both models and empirical analyses show that trade liberalisation can, in turn, boost aggregate productivity by reallocating resources to exporting, more productive firms.
Firm heterogeneity also has implications for aggregate productivity growth. In the presence of heterogeneous firm performance, aggregate productivity developments also depend on the efficiency with which production factors are allocated across firms as a result of two fundamental developments: (i) the birth and death of firms, and (ii) their expansion and contraction. Factor reallocation is productivity-enhancing when, as a result of such developments, resources shift from the least to the most productive firms. However, constraints such as credit frictions or structural rigidities may impair the efficient allocative process.
The aim of this article is to take stock of the implications of firm heterogeneity for competitiveness in the EU. The structure of the article is as follows. Section 2 examines the link between firm productivity and trade from an empirical standpoint. Within that section, Box 1 discusses the workhorse theoretical trade models underpinning the empirical analysis, whereas Box 2 assesses the role of firm heterogeneity in explaining the reactivity of aggregate exports to changes in real exchange rates, within and across countries. Section 3 focuses on the efficiency with which capital and labour are allocated across firms within a given sector, which is an important determinant of productivity growth. Section 4 concludes with some policy implications.
Directorate General Communications
Sonnemannstrasse 20, 60314 Frankfurt am Main, Germany
Tel.: +49 69 1344 7455, E-mail: media@ecb.europa.eu
Website: www.ecb.europa.eu
page source http://www.ecb.europa.eu/pub/
