The assumption that exporting firms face a fixed cost of exporting has striking implications.3
In the presence of firm heterogeneity, only the more efficient ones can afford to pay the fixed cost of
exporting. Hence, these costs generate a partition of firms into exporting and non-exporting firms.
The former sell to both the domestic and the foreign markets, whereas the latter only sell to the
domestic market. Hence, this partition of firms implies that exporting firms are larger and more
productive than non-exporting firms, and this is consistent with the plant-level empirical evidence.
This setting based on firm heterogeneity and fixed costs of exporting can help explain the effects
of trade liberalization on intra-industry reallocation of resources and aggregate productivity. In
particular, it allows to explain the empirical finding that output share reallocations among firms
with different productivity levels are the main source of trade-induced productivity gains. The
intuition is the following. In the trade regime, all domestic firms face foreign competition in their
domestic market, which induces a loss of revenue and market share. For non-exporting firms this
translates into a loss of profits. Among these non-exporting firms, the less efficient incur negative
profits and exit, whereas the other non-exporting firms survive with a lower market share than in
autarky. Conversely, exporting firms expand their market share and profits because their access to
foreign markets more than compensate the loss of revenue in the domestic market. Hence, trade
induces both the exit of less efficient firms and the reallocation of market shares towards the more
efficient exporting firms. Both effects contribute to an increase in average productivity.
3In section 5 we will see that, as shown by Manasse and Turrini (2001), the interaction of fixed costs of exporting
and firm heterogeneity has also striking implications with regard to the effects of trade liberalization on wage
inequality.
10