Trade Liberalization, Firm Performance and Labour Market Outcomes in the Developing World: What Can We Learn from Micro-LevelData?

3 Evidence on the Effects of Trade Liberalization on Firm

Performance⁴

3.1 Evidence on the pro-competitive effect of trade liberalization

The pro-competitive effect of trade liberalization has traditionally been investigated by using
industry-level data. This literature examines the correlation between trade exposure and price-
cost margins at the industry level, using import penetration rates as a measure of trade exposure.
Empirical studies for industrial countries (see, for instance, Schmalensee, 1989) show a negative
correlation between price-costs margins and import competition, especially when domestic con-
centration is high. This result is consistent with the argument that import competition reduces
profits in industries which enjoy above normal returns.

As for the developing world, the country studies reported in Roberts and Tybout (1996), relative
to Chile, Colombia, Mexico, Morocco and Turkey, add to the standard industry-level analysis a
study of the correlation between trade exposure and price cost-margins at the plant-level, to see
whether the observed effects at the industry-level are common to all producers in an industry or
are concentrated in a subset of producers.⁵

3.1.1 Industry-level evidence

As far as the industry-level analysis is concerned, the country studies use the industry-level price-
cost margin to measure industry-level performance. It is immediate to show that, if we assume that
unit expenditures on labor and materials are constant with respect to output, then the price-cost
margin is a monotonic transformation of the price-marginal cost mark-up. The price-cost margin
in industry j at time t, P CMjt, is measured as the value of output (PjtQjt) minus expenditures
on labor and materials over the value of output. It equals profits (Πjt) plus payments to capital

⁴See also Tybout (2001) on the topics covered in this section.

⁵The authors of the country studies reported in Roberts and Tybout (1996) are: J. Tybout for Chile (ch.9), M.
Roberts for Colombia (ch.10), J.-M. Grether for Mexico (ch.11), M. Haddad, J. de Melo and B. Horton for Morocco
(ch.12) and F. Foroutan for Turkey (ch.13).

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