as a proportion of the industry’s value of output:
PCMjt =(Πjt+(rt + δ)Kjt) /PjtQjt
(9)
where Kjt is capital stock, rt is the competitive gross return on capital and δ is the depreciation
rate. Equation (9) shows that sectoral PCMs are influenced by both the rate of profit and the
capital intensity. The country studies use the following basic model:
PCMjt = f (Hjt,IMPjt,Hjt ∙ IMPjt,Kjt∕Qjt,Ij,Tt)
(10)
Here, Hjt is the Herfindahl index, an index of industry structure which is inversely correlated
with the degree of competition among domestic producers. IMPjt is the import penetration
ratio; the pro-competitive effect of trade liberalization should show up as a negative correlation
between the price-cost margin and import penetration. The interaction term Hjt ∙ IMPjt tests the
hypothesis that, if highly concentrated industries enjoy above normal profits because of market
power, then they should be more sensitive to foreign competition. Kjt ∕Qjt is the capital-output
ratio, which controls for sectoral differences in capital-intensity (see equation (9)). Finally, Ij and
Tt are industry and time dummies, respectively.
Since most of variation in the panel data used in these country studies is across industries, it
is not surprising that the estimation results crucially depend on whether or not industry dummies
are included in the regression equation. When industry dummies are excluded, four out of five
countries studies (i.e., those for Chile, Colombia, Mexico and Morocco) find that the coefficients
of both IMPjt and Hjt ∙ IMPjt are negative and highly significant. This suggests that import
competition is negatively correlated with sectoral profitability and that the effect is larger for
highly concentrated industries.
These results are substantially weakened, however, when industry dummies are included in the
regression equation. Note that in this case estimated coefficients only reflect temporal variation in
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