Plant-and Firm-Level Evidence on "New" Trade Theories

By relaxing the assumption of perfect competition, the "new" trade theory has generated a rich body of predictions concerning the effects of commercial policy on price-cost mark-ups, firm sizes, exports, productivity and profitability among domestic producers. This chapter critically assesses the plant- and firm-level evidence on these linkages. Several robust findings are identified. First, mark-ups generally fall with import competition. Second, import-competing firms cut back their production levels when foreign competition intensifies. Third, trade rationalizes production in the sense that markets for the most efficient plants are expanded, but large import-competing firms tend to simultaneously contract. Fourth, exposure to foreign competition often improves intra-plant efficiency. Fifth, firms that engage in international activities tend to be larger, more productive, and supply higher quality products. Finally, the short-run and long-run effects of commercial policy on exports and market structure depend upon initial conditions, sunk entry costs, and the extent of firm heterogeneity.