International Trade and Investment Program Meeting

December 5-6, 2008
Robert Feenstra, Organizer

Costas Arkolakis, Yale University and NBER
Market Penetration Costs and Trade Dynamics

Arkolakis introduces trade dynamics into a static model of international trade with product dif-ferentiation, heterogeneous productivity firms, and increasing marginal market penetration costs. He interprets firms as ideas that materialize into production, where an idea is a way to produce a differentiated good with a given productivity. His model generates a distri¬bution of firms’ productivities based on two minimal assumptions: continuous entry of ideas at a certain rate and productivities of ideas that evolve according to a geometric Brownian motion. The cross-sectional predictions of the model for the distribution of domestic and exporting sales of firms are in line with firm-level data. In addition, the model delivers new predictions consistent with observations of the dynamics of domestic and exporting sales of firms. It predicts that many small firms enter and exit the market very frequently and that the growth rate, as well as the variance of the growth rate, of sales is higher for small firms.

Costas Arkolakis, Yale University and NBER
Marc-Andreas Muendler, UC, San Diego and NBER
The Extensive Margin of Exporting Goods: A Firm-Level Analysis

Arkolakis and Muendler examine three-dimensional panel data for Brazilian and Chilean manufac¬turing exporters, their products, and destinations. The data show that the distribution of the exporters’ number of goods (the exporter scope) is robust within destinations and approximately optimal, with most firms selling only one or two goods. Also, the exporter scope is positively associated with average sales per good within destinations but not across destinations. The researchers present a heterogeneous-firm model with product choice that implies these regularities and retains key predictions of previous trade models. Their model explains the regularities with diseconomies of scope in product-entry costs on the distribution side.

Pravin Krishna, Johns Hopkins University and NBER
Mine Senses, Johns Hopkins University
International Trade and Labor Income Risk in the United States

Krishna and Senses study the links between international trade and labor income risk faced by workers in the United States. They use longitudinal data on workers to estimate time-varying individual income risk at the industry level. They then combine those estimates with measures of exposure to international trade. Importantly, by contrasting estimates from various sub-samples of workers, such as those who switched to a different industry (or sector) with those who remained in the same industry throughout the sample, they are able to study the relative importance of the different channels through which international trade affects individual income risk. Finally, they use these estimates to conduct a welfare analysis evaluating the benefits or costs of trade through the income risk channel. They find that increased import penetration has a statistically and economically significant effect on labor income risk in the United States. Under standard parameter values for the inter-temporal discount rate and the rate of risk aversion, this increase in risk is equivalent to a reduction in lifetime consumption of about 5 percent.

Jeffrey Grogger, University of Chicago and NBER
Gordon Hanson, UC, San Diego and NBER
Income Maximization and the Selection and Sorting of International Migrants

Two prominent features of international labor movements are that the more educated are more likely to emigrate (positive selection) and that more-educated migrants are more likely to settle in destination countries with high rewards to skill (positive sorting). Using data on emigrant stocks by schooling level and source country in OECD destinations, Grogger and Hanson find that a simple model of income maximization can account for both phenomena. The results on selection show that migrants for a source-destination pair are more educated relative to non-migrants as the absolute skill-related difference in earnings between the destination country and the source grows. The results on sorting indicate that the relative stock of more-educated migrants in a destination increases with the absolute earnings difference between high and low-skilled workers. The authors use their framework to compare alternative specifications of international migration, to estimate the magnitude of migration costs by source-destination pair, and to assess the contribution of wage differences to how migrants sort themselves across destination countries.

Dhammika Dharmapala, University of Connecticut
C. Fritz Foley, Harvard University and NBER
Kristin Forbes, MIT and NBER
The Unintended Consequences of the Homeland Investment Act: Implications for Financial Constraints, Governance, and International Tax Policy

The Homeland Investment Act of 2004 provided for a one-time tax holiday on the repatriation of foreign earnings, thereby allowing U.S. multinationals to access earnings retained abroad at a lower cost. Firms responded to this act by significantly increasing repatriations from foreign affiliates. Dharmapala and co-authors analyze the impact of the tax holiday on firm behavior. They control for endogeneity and omitted variable bias by using instruments that identify the firms likely to receive the largest tax benefits from the holiday. Repatriations did not lead to an increase in investment, employment, or R and D—even for the firms that lobbied for the tax holiday stating these intentions. Instead, a $1 increase in repatriations was associated with an increase of approximately $1 in payouts to shareholders. These responses are consistent with the view that the domestic operations of U.S. multinationals were not financially constrained and that U.S. multinationals are reasonably well-governed. The results also have significant implications for understanding the impact of the U.S. corporate tax system on the behavior of multinational firms.

Ram Acharya, Industry Canada
Wolfgang Keller, University of Colorado and NBER
Estimating the Productivity Selection and Technology Spillover Effects of Imports

Economists emphasize two channels through which import liberalization affects productivity, one operating between and the other within firms. According to the former, import competition triggers market share reallocations between domestic firms with different technological capabilities (selection). At the same time, imports also can improve firms' technologies through learning externalities (spillovers). Acharya and Keller present evidence for a sample of industrialized countries over the period 1973 to 2002. First, in the long run, import liberalization lowers productivity in domestic industries through selection. This finding confirms the prediction of models with firm heterogeneity in which unilateral liberalization lowers the profits of domestic relative to foreign exporters. Second, if imports involve advanced foreign technologies, then liberalization also generates technological learning that can on net raise domestic productivity. Third, for short time horizons of up to three years, a surge in imports typically raises domestic productivity. Because the number of firms at home and abroad does not change much in the short run, new competition from foreign firms has a pro-competitive effect. The authors also find that high entry barriers, especially regulation, slow down the process of market share reallocation between firms. Overall, the results support models in which trade triggers both substantial selection and technological learning.

Pinelopi Goldberg, Princeton University and NBER
Amit Khandelwal, Columbia University
Nina Pavcnik, Dartmouth College and NBER
Petia Topalova, IMF
Imported Intermediate Inputs and Domestic Product Growth: Evidence from India

New goods play a central role in many trade and growth models. Goldberg and her co-authors use detailed trade and firm-level data from a large developing economy—India—to investigate the relationship between declines in trade costs, the imports of intermediate inputs, and domestic firm product scope. They estimate substantial static gains from trade through access to new imported inputs. Accounting for new imported varieties lowers the exact import price index for intermediate goods on average by an additional 4.7 percent per year relative to conventional gains through lower prices of existing imports. Moreover, they find that lower input tariffs account on average for 31 percent of the new products introduced by domestic firms, which implies potentially large dynamic gains from trade. This expansion in firms' product scope is driven predominately by international trade increasing access of firms to new input varieties rather than by simply making existing imported inputs cheaper. Hence, their findings suggest that an important consequence of the input tariff liberalization was to relax technological constraints through firms' access to new imported inputs that were unavailable prior to the liberalization.

Stefania Garetto, Princeton University Input Sourcing and Multinational Production

A large portion of world trade happens within firms’ boundaries. Garetto proposes a new general equilibrium framework in which firms decide whether to outsource to unaffiliated suppliers or to integrate input manufacturing. Multinational corporations and intra-firm trade arise en¬dogenously when firms integrate production in foreign countries. By outsourcing, firms benefit from suppliers’ good technologies, but pay a mark-up price. Intra-firm sourcing allows firms to save on mark-ups and to match a firm’s productivity with possibly lower foreign wages. Imperfect competition establishes a link between FDI liberalization and optimal pricing: suppliers find it optimal to reduce their prices in response to the possibility of in-sourced production (the “pro- competition effect” of multinationals). The model is calibrated to match aggregate U.S. trade data, and used to quantify the gains arising from vertical multinational production and intra-firm trade. The computed gains are currently about 1 percent of consumption per capita, and the model shows that further liberalization can increase them substantially.

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