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

the plant-level evidence in the light of the new trade theory. Our work is complementary to
his, since our review also extends to the effects of trade reforms on the labor markets and, most
important, it provides a more extensive treatment of the theoretical foundations of empirical work.

The paper is organized as follows. Section 2 illustrates the theoretical predictions concerning
the effects of trade liberalization on firm performance. Section 3 discusses the relevance of these
effects for trade liberalizing developing countries in the light of the micro-level evidence. Section
4 reports the plant-level evidence on the impact of trade liberalization on learning and technology
diffusion. Sections 5 and 6 examine the labor market outcomes of trade liberalization. Section 7
analyzes the effects of the 1991 trade liberalization in India. Section 8 concludes.

2 Trade Liberalization and Firm Performance

When markets are imperfectly competitive, trade liberalization may affect firm-level variables, such
as mark-ups, size and productivity. This section illustrate these effects, while the next reviews the
plant-level evidence on their empirical relevance.

To see how trade liberalization can affect firm performance, first consider a simple setting
with representative firms.¹ Next we will show that more can be learned by allowing for firm
heterogeneity. Consider then n identical firms competing `a la Cournot in a sector producing a
homogeneous good. The aggregate demand has a constant elasticity σ . The technology features
plant-level scale economies and is summarized by the following total cost function:

TC = f +¹ q                              (1)

φ

where q is firm output, f is a fixed overhead cost and 1/'φ is a constant marginal cost. Both f and
1/'φ are in terms of labor, the only production factor, chosen as the numeraire. Profit maximization

¹This example draws on Markusen (1981). Similar results under different assumptions about market structure
can be found in Krugman (1979) and Helpman and Krugman (1985).

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