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



To sum up, evidence on Indian manufacturing firms suggests that, although trade liberalization
may have increased uncertainty for firms and workers, it may also have provided them with a
powerful incentive to increase productivity, thereby inducing more investment in training of the
workforce on the part of firms, and more effort (aimed at promotions) on the part of workers.

8 Conclusions

In this paper we have reviewed the micro-level evidence on the effects of trade liberalization in
developing countries. We have focused, in particular, on the empirical relevance of the effects
predicted by the trade theory in the presence of increasing returns to scale, imperfect competition
and firm heterogeneity. The main findings can be summarized as follows.

1) There is indirect evidence of trade-induced productivity gains in the developing countries
opting for freer trade. In particular, firms’ productivity growth generally rises after trade reforms.
More interestingly, the evidence shows that the productivity of firms exposed to international
competition (i.e., exporters and import-competing firms) grows much more than that of firms
belonging to the non-traded sectors.

2) The evidence suggests that output share reallocations among firms with different productivity
levels are the main source of trade-induced productivity gains. This result is in line with trade
models, such as Melitz (2002), in which firm heterogeneity and sunk entry costs into foreign markets
play a crucial role in the mechanics of efficiency gains from trade liberalization.

3) Firms in import-competing sectors enjoy the highest efficiency gains from trade. One ex-
planation for this result is that the disciplining effect of trade liberalization is stronger in import
competing sectors. Another is that the benefits stemming from cheaper imports of (embodied or
disembodied) technology are more relevant for firms belonging to the comparative disadvantage
technology-intensive sectors.

approach which produces remarkably consistent results.

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