the data, and hence they are better suited to isolate the pro-competitive effect of increased foreign
competition. The country studies show that, when industry dummies are included, evidence of a
significant pro-competitive effect of trade liberalization is found only in Colombia and Mexico.
3.1.2 Plant-level evidence
The country studies also examine the pro-competitive effect of foreign competition by looking at
plant-level evidence on price-costs margins. They use the following basic model:
PCMijt = f(Sijt,S2jt,IMPjt,Sijt ∙ IMPjt,Kjt∕Qjt,Ij,T) (11)
where PCMij t is the price-cost margin of plant i in industry j and time t, Sijt is the share of plant
i’s output in sector j’s total domestic production, and the other variables in (11) have the same
interpretation as in equation (10). The interaction term Sijt ∙ IMPjt tests the hypothesis that
the pro-competitive effect of foreign competition is stronger among firms with a higher domestic
market share.
The coefficient of the linear term Sijt is generally positive and significant, whereas that of the
quadratic term Si2jt is generally negative. This suggests that price-costs margins rise at a decreasing
rate with market shares. More interestingly, in every country studied the coefficients on IMPjt
and Sijt ∙ IMPjt are negative and highly significant, whereas industry dummies do not generally
have any explanatory power. Thus, exposure to foreign competition is associated with lower price-
cost margins, and the effect is concentrated among the large plants. This result suggests that
looking at plant-level evidence highlights a powerful and systematic pro-competitive role of foreign
competition.
3.2 Plant-level evidence on trade-induced productivity gains
The literature which uses plant-level data to investigate the productivity gains from trade liberal-
ization shows mixed results. Tybout, de Melo and Corbo (1991) find little evidence of productivity
13