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

of beneficial spillover effects from foreign owned to local firms; 7) There is evidence of skill
upgrading induced either by technology imports, or by trade-induced reallocations of market
shares in favor of plants with higher skill-intensity; 8) There is no evidence of trade-induced
increases in labor demand elasticities. Direct evidence suggests, however, that trade exposure
raises wage volatility; 9) There is no evidence of substantial employment contraction in import
competing sectors.

JEL classification: F1

Keywords: Plant-level evidence, Firm heterogeneity, Productivity growth, Scale efficiency,
Technology transfer, Wage inequality, Wage volatility, Labor demand elasticity, India.

1 Introduction

In the last decades, many developing countries (e.g., Chile in the late 1970s, Turkey in 1983, Mexico
in 1985, Colombia in 1990-91, India in 1991) have undergone a deep economic transformation which
has involved a process of dramatic trade liberalization. This paper reviews the main empirical
studies using firm and plant-level panel data to investigate the effects of trade reforms on firm
performance and labor market outcomes in developing countries. We discuss, in particular, the
effects of the 1991 trade reform in India, since it provides an excellent controlled experiment in
which the effects of a drastic trade regime change can be measured.

The allocative efficiency argument for free trade has been extensively debated by the traditional
trade theory in the context of perfectly competitive markets. Since the late 1970s, however, the
so-called new trade theory has shown that the gains from trade originating from specialization
according to comparative advantage are only part of the story, since in the presence of imperfectly
competitive markets trade liberalization can bring additional gains by reducing the deadweight
losses created by domestic firms’ market power. In particular, it has been argued that trade liber-
alization, by increasing competition, forces firms to lower price-marginal cost mark-ups and hence
move down their average cost curves, thereby raising firm size and scale efficiency. Recently, it

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