The Role of Trade in Intra‐Industry Productivity Growth—the Case of Old and New European Union Countries

• DOI: http://doi.org/10.1111/rode.12061
• Published date: 01 November 2013
• Date: 01 November 2013
• Author: Aleksandra Parteka

The Role of Trade in Intra-Industry Productivity

Growth—the Case of Old and New European

Union Countries

Aleksandra Parteka*

Abstract

The purpose of this paper is to evaluate the role of trade in productivity growth in a sample of 30 sectors in

25 EU countries in the period of rapid East–West integration (1995–2007). Shift-share analysis is used to

show that changes in value added per hour worked in these countries appear to be mainly due to positive

developments (rising productivity) within single industries and only to a lower extent result from a shift

towards higher productivity activities. Trade is found to be an important positive determinant of intra-

industry productivity growth in European countries. Exports and imports alike can be associated with effi-

ciency gains, but intermediate good exchange and trade with New Member States exert a particularly

strong influence on intra-industry productivity growth in the EU.

1. Introduction

Productivity growth in the EU remains a considerable concern. The truth is that the

EU still lags behind its historical reference point—the USA—even if we take into

account the fact that in Western European countries some productivity convergence

took place until the mid 1990s (especially in the years 1950–1973, but also afterwards,

when productivity growth in Europe was less rapid than before but still more dynamic

than in the USA). The European slowdown after 1995 is believed to have been

caused mainly by a less dynamic emergence of the knowledge economy in Europe

than in the USA (Van Ark et al., 2008). Consequently, in 2009 hourly labor produc-

tivity in the USA was almost 34% higher than in EU countries (EU27, data from

Eurostat), and the gap has increased by 4 percentage points since 1995.

The EU enlargements (2004, 2007) dramatically changed the overall productivity

levels of the union, mainly as a result of the accession of countries (New Member

States—NMS) with considerably lower levels of labor productivity than the EU-15. In

2004, the year of the biggest enlargement ever, when 10 new countries joined the EU,

labor productivity per hour worked (based on gross domestic product (GDP),

Purchasing Power Standard (PPS), data from Eurostat) ranged from only 42% of the

EU-15 average in Estonia to 125% in Belgium and 158% in Luxembourg. In 2009,

* Aleksandra Parteka: Gdansk University of Technology, Faculty of Management and Economics,

Narutowicza 11/12, 80–233 Gdansk, Poland (aparteka@zie.pg.gda.pl). The author gratefully acknowledges

comments and suggestions on an earlier draft of this paper from two anonymous referees, as well as the

participants at the European Trade Study Group Conference (Copenhagen Business School, 2011) and

Warsaw International Economic Meeting (University of Warsaw, 2010). Financial support from Polish

Ministry of Science and Higher Education and National Science Centre (research grant 2011/01/B/HS4/

04759) is gratefully acknowledged. All the remaining errors are mine.

Review of Development Economics, 17(4), 712–731, 2013

DOI:10.1111/rode.12061

© 2013 John Wiley & Sons Ltd

hourly labor productivity in the NMS was at the level of 56% of the EU-15 typical

value, which when compared with only 42% in 1997 indicates that some process of

productivity convergence did however take place within the EU.

Several features may determine productivity growth patterns, but “new-new” trade

theory (see the influential contribution by Melitz (2003), as well as Bernard et al.

(2007), and Melitz and Ottaviano (2008)1) has extended “new” trade theory (drawing

on Krugman, 1980) views on patterns of intra-industry trade and the channels through

which trade can stimulate productivity, thanks to the inclusion of firm heterogeneity.

Apart from facilitating the transfer of knowledge and technology diffusion across

countries (Eaton and Kortum, 2001), trade is now believed to stimulate firms to

behave more competitively, raising within-industry productivity.2We focus in this

aspect.

In the specific case of the EU, the recent decades (since the 1990s) have been

characterized by major changes linked to the opening towards the Central and

Eastern Europe countries (CEECs), mainly through trade and political integration.

Along with the integration process, the degree of trade openness of the EU as a

whole has risen.3The nature of trade also changed as a result of more intense out-

sourcing practices and fragmentation of production across Europe, mainly as a

result of the considerable cost advantage of CEECs and falling trade costs owing to

the integration process (Martin, 2006).

The empirical evidence of the effects of international trade on growth and produc-

tivity based on cross-country panel studies (becaue of our panel data approach, we

leave aside country-specific studies) is vast.4However, it seems that a gap exists con-

cerning empirical panel-data analysis of the productivity–trade relationship that refers

to the enlarged EU and simultaneously takes into account both the former EU-15

countries and the NMS and trade flows between them. Studies concerning productiv-

ity growth in bigger groups of European countries focus on the sources of poor

productivity developments in EU-15 sectors compared with the USA (Van Ark et al.,

2008; McMorrow et al., 2010). However, a lack of evidence concerning the whole

integrated EU (after the enlargements of 2004 and 2007), including the NMS, is

noticeable.5

Consequently, this study contributes to the existing literature on the effects of

European integration on productivity growth in several ways. First of all, we consider

a large sample of EU countries, both “old” and “new” Member States, within a

homogeneous setting allowing us to analyze the trade–productivity growth nexus in

the period of rapid East–West integration. Second, we separately assess the impor-

tance of inter- and intra-industry developments concerning productivity upgrading

and efficiency gains. Third, we distinguish not only between the heterogeneous effects

of exports and imports, but also take into account the typology of partner countries

and goods traded. By doing this, we can discriminate between various responses of

intra-industry productivity to trade with the EU-15 and with the NMS, and at the

same time account for the differences in the productivity effects of intensified overall

exchange of goods and enhanced trade in intermediate goods (linked to outsourcing)

as discussed in Keller (2000).

The rest of the paper is structured as follows: in section 2, we describe our industry-

level data along with emerging descriptive evidence and the break down of overall

labor productivity growth is into intra-industry efficiency gains and shift effects. In

section 3, we present the results of the empirical model relating intra-industry produc-

tivity developments with trade. Section 4 concludes and provides guidelines for

further extensions.

TRADE ROLE IN INTRA-INDUSTRY PRODUCTIVITY 713

© 2013 John Wiley & Sons Ltd