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



growth due to output share reallocations equals 16.6%, while the rest (8.7%) is due to within
plants productivity growth. The figures for the import competing sector and the non-traded sector
are, respectively, 21.3% and 10.7%, and 2.4% and 3.8%. These results strongly suggest that the
reshuffling of resources in favor of more productive firms is a critical determinant of productivity
growth and that, consistent with Melitz (2002)’s model, this effect can be largely due to trade
liberalization.

3.3 More on trade policy and scale efficiency

Tybout and Westbrook (1995) also look at patterns of sectoral change in measures of foreign
competition to see whether they are correlated with estimated productivity changes. Correlations
are generally insignificant. The only robust finding is that heightened import competition reduces
scale efficiency. This result seems to contradict one of the main predictions of the simplest models of
the new trade theory (such as the one illustrated in Section 2), i.e., that in the presence of imperfect
competition the trade-induced increase in firm size can be an important source of efficiency gains.
Indeed, most general equilibrium models based on imperfect competition (see, for instance, Cox
and Harris, 1985) predict that trade liberalization will generate welfare gains primarily through
the mechanism of increased scale.

The empirical evidence on the effects of trade liberalization on firm size is mixed. Roberts and
Tybout (1991) find that higher import penetration is associated with lower employment per plant
in Chile and Colombia. Conversely, other works on developed countries find that the removal of
tariff protection increases output.
8

The theoretical literature emphasizes that the effects of trade policy in the presence of imperfect
competition are generally sensitive to the specific assumptions concerning market structure and
industry characteristics. Following Head and Ries (1999), now we argue that a slight modification
of the simple model illustrated in Section 2 can help explain the finding of Tybout and Westbrook

8See, for instance, Baldwin and Gorecki (1986) and Caves (1984) for an analysis of average plant scale in Canada
and Australia, respectively.

18



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