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

(FIML), the following two-equations system:

JJ

yit =1if βxXit + βeet + ₌₁βj^cln(AVCit-j)+ ₌₁δjyit-j+               (19)

+η_it ≤ 0; and y_it =0 otherwise

Jc                      Jc                          J^y

ln(AVCit) = γ₀ +γ_eln(et)+^Xγ_j^kln(Kit-j)+^Xγ_j^cln(AVCit-j)+^Xγ_j^yyit-j + vit(20)
j=1                j=1                   j=1

Equation (19) represents the export market participation decision by plant i at time t.Itisa
dynamic discrete choice equation in which yit takes a value of one if the firm decides to export
and a value of zero otherwise. Here, X_it is a vector of exogenous plant characteristics, e_t is the
real exchange rate (which proxies for changes in relative prices that are common to all plants), the
summation of the terms AV Cit-j is a distributed lag in the average variable cost (which proxies for
marginal cost), the summation of the terms y_it-j is a distributed lag in the participation variable,
and η_it is a disturbance.¹³ This equation allows to test whether, after controlling for plant-specific
characteristics, for movements in industry relative prices and for past export participation decisions,
past realizations of marginal costs are negatively correlated with the decision to break into foreign
markets. If this is the case, we can conclude that, ceteris paribus, firms experiencing a productivity
increase (as proxied by a fall in marginal costs) are more likely to be exporters.

For all countries and for most industries, FIML estimation results show that the sum of co-
efficients of the distributed lag in marginal costs is negative. Individual coefficients are never
significant, however, (maybe because of the high collinearity among them) and some of them are
positive. In sum, these results provide weak evidence in favor of the hypothesis that firms improving
their relative performance self-select into foreign markets.¹⁴

Equation (20) allows to test the learning-by-exporting hypothesis: if firms experience cost
reductions after entering foreign markets, then, after controlling for firm-specific differences in

¹³ In both equations, the disturbances are composed of unobserved plant random effects plus transitory noise.

¹⁴ FIML estimation results also show that, in all countries and all industries, firms with large capital stocks are
more likely to become exporters. Further, firms with past export experience are more likely to be exporters. This
latter result is consistent with the literature on hysteresis.

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