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

expected between the efficiency term ωit and capital stock, conditional on surviving plants. This
implies that the estimated coefficient of capital stock in production function (12) is generally biased
downward.

Pavcnik (2002) proposes an alternative methodology which addresses most of these issues. In
particular, the problem of identification of the trade effects is addressed by comparing plants’ pro-
ductivity growth in the export oriented and import competing sectors with that of firms in the
non-traded sector. The simultaneity and self-selection biases are addressed by using a semipara-
metric procedure in which the plant-specific efficiency term is modeled as a time-varying function
of capital and investment.

Pavcnik implements her methodology using data on Chilean manufacturing plants for the period
1979 to 1986, i.e., in the aftermath of a drastic trade liberalization. Plants are partitioned into
three groups. Plants belonging to a 4-digit ISIC industry exporting more than 15% of its total
output are characterized as export oriented. Plants belonging to an industry whose ratio of imports
to total output exceed 15% are instead characterized as import competing. The rest of the plants
belong to the non-traded sector.

Pavcnik uses the mentioned procedure to obtain consistent estimates of plants’ productivity
growth in each of these groups. The results are striking. In the period 1979-1986, the productivity
of export oriented plants grew, on average, by 25.4%, that of import competing plants grew by
even more (31.9%), while that of plants in the non-traded sector grew by only 6.2%. These results
suggest a dramatic productivity growth differential in favor of plants exposed to international
competition with respect to inward-oriented plants. They also suggest that, in the case of a
unilateral trade liberalization (such as the one experienced by Chile), trade-induced productivity
gains can be higher for import competing plants relative to export oriented plants.

Pavcnik also uses a procedure similar to that used by Tybout and Westbrook (1995) to dis-
entangle the contribution of output share reallocations among firms with different productivity
levels to productivity growth. She finds that in the export oriented sector, average productivity

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