Trading activities, productivity and markups: Evidence for Spanish manufacturing

• Author: Juan A. Máñez Castillejo,María E. Rochina Barrachina,Juan A. Sanchis Llopis,Consuelo Mínguez Bosque
• Published date: 01 March 2020
• Date: 01 March 2020
• DOI: http://doi.org/10.1111/twec.12892

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wileyonlinelibrary.com/journal/twec World Econ. 2020;43:644–680.

© 2019 John Wiley & Sons Ltd

Received: 12 June 2019

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Accepted: 11 September 2019

DOI: 10.1111/twec.12892

SPECIAL ISSUE ARTICLE

Trading activities, productivity and markups:

Evidence for Spanish manufacturing

Juan A.Máñez Castillejo1,2

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ConsueloMínguez Bosque3

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María E.Rochina Barrachina1,2

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Juan A.Sanchis Llopis1,2

1University of Valencia, Valencia, Spain

2ERICES, Valencia, Spain

3IVIE, Valencia, Spain

Funding information

Secretaría de Estado de Investigación, Desarrollo e Innovación, Grant/Award Number: ECO2017‐86793‐R

KEYWORDS

exports, firm‐level data, imports of intermediates, manufacturing, markups, output prices, total factor productivity

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INTRODUCTION

The liberalisation of international trade has had an important impact on firms' internationalisation

strategies and on the internationalisation of production processes through the incorporation of im-

ported goods in the value chain. These trends mean an impulse to the intensification of exports and

to the improvement of local production through imports of intermediate inputs, which could enhance

firms' productivity and profits ultimately.

This paper aims to contribute to the international trade literature by exploring firms trading strate-

gies and their impact on firms' productivity and markups. In particular, we focus on firms' imports of

intermediates and export strategies, and analyse the dynamic links between them and their impact on

productivity and markups.1

Thus, the first strand of the international trade literature we seek to contribute is the analysis of

the dynamic linkages between firms' imports of intermediates and export decisions. On the one hand,

exporters with previous knowledge and experience operating in international markets may find it eas-

ier to incorporate foreign inputs in their production process. Moreover, they may feel the competitive

pressure of other traders that incorporate higher quality inputs. On the other hand, if importers of

intermediates profit from the diffusion of new technologies and knowledge embodied in the imported

inputs and produce higher quality products, this may facilitate their exports.

1 Henceforth, it should be understood that when we speak about exports, we refer to exports of the final product of the firm

(that could be an intermediate input for other firms), and, when we speak about imports of intermediates, we refer to imports

of intermediate inputs.

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A crucial point in the analysis of the dynamic linkages between importing intermediates and ex-

porting is the recognition that both activities may imply costs that are sunk in nature. For instance,

exporters have to research foreign demand and competition, establish marketing and distribution chan-

nels, and adjust their product characteristics to meet foreign tastes and/or fulfil quality and security

legislation of other countries. Further, importers need to invest resources to find the international

suppliers that better meet their needs both in terms of costs and quality. Acknowledging the existence

of sunk costs implies that current exports and imports depend on past exports and imports trajectories,

and, more interestingly, that transitory changes in trade policy or conditions may lead to permanent

changes in trade status; that is, sunk entry or exit costs produce hysteresis in trade flows.2 Nevertheless,

it is important to note that although persistence in exporting and/or importing might be caused by sunk

costs, there might be other competing sources of persistence, such as underlying (either observed or

unobserved) firm heterogeneity.

In our analysis of the dynamic linkages between firms' imports of intermediates and export deci-

sions, we explicitly recognise the role that importing/exporting sunk costs might play. In particular,

we estimate a maximum likelihood dynamic model of the firms' joint strategy of importing interme-

diates and exporting in which we allow firms' past import (export) decisions to affect not only future

import (export) decisions but also export (import) decisions, since the performance of one activity

can enhance expected gains of the performance of the other. Furthermore, when controlling for com-

peting sources of persistence in a given trading status, we devote special attention to the role of past

productivity, as it will allow exploring possible self‐selection/continuation effects into importing of

intermediates and/or exporting (Aw, Roberts, & Xu, 2011; Máñez‐Castillejo, Rochina‐Barrachina, &

Sanchis‐Llopis, 2015).

The second strand of the international trade literature we aim to contribute is related to the link

between firms' trading activities and productivity. The relationship between exports and productivity

has been comprehensively studied.3 The empirical evidence suggests that exporters are more produc-

tive than non‐exporters (see Bernard & Jensen, 1999, among others). This could be the result of a

process of self‐selection of the more productive firms into foreign markets (Melitz, 2003) and/or may

arise from potential productivity gains that stem from export participation (learning‐by‐exporting

hypothesis, LBE henceforth). Productivity gains from exporting are usually related to growth of sales

that allows firms profiting from economies of scale, knowledge flows from foreign customers or in-

creased competition in foreign markets that forces firms to behave more efficiently. Whereas there is

widespread empirical evidence on self‐selection, the evidence on LBE is mixed and far from conclu-

sive. There are studies that do not find any evidence of LBE, and among those that do find evidence

in favour of it, the findings differ both in the magnitude and in the duration of the LBE effect.4

De Loecker (2013), however, argues that most previous tests for LBE could be flawed. The usual

empirical strategy is to look at whether a productivity estimate, typically obtained as the residual from

a production function estimation, increases after firms become exporters. Within the framework of

the control function approach to estimate productivity (Levinsohn & Petrin, 2003; Olley & Pakes,

1996), De Loecker (2013) suggests that a proper test for the LBE hypothesis requires to move from

2 The first attempt to test for the sunk cost hysteresis hypothesis in exporting is Roberts and Tybout (1997), for Colombian

manufacturing. More recent empirical evidence is Bernard and Jensen (2004) for the US, and Campa (2004) and Máñez‐

Castillejo et al. (2008) for Spain.

3 See Greenaway and Kneller (2007), Wagner (2007, 2012) and ISGEP (2008) for thorough reviews of this literature.

4 Silva et al. (2010) provide a detailed survey on the LBE literature. Further, Martins and Yang (2009) provide a meta‐analysis

for 33 empirical studies. Singh (2010) concludes that studies supporting self‐selection overwhelm studies supporting

learning‐by‐exporting.

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the standard assumption that productivity is governed by an exogenous Markov process to assum-

ing a more general (endogenous) Markov process in which past export experience might influence

future productivity. Some recent papers following this approach are De Loecker (2007, 2013), De

Loecker and Warzynski (2012), Manjón, Máñez, Rochina‐Barrachina, and Sanchis‐Llopis (2013),

Máñez‐Castillejo, Rochina‐Barrachina, Sanchis‐Llopis, and Vicente (2014) and Máñez‐Castillejo et

al. (2015).

In recent years, there is an increasing interest in the analysis of the impact of importing intermedi-

ate inputs on productivity. Special attention has been paid to test the hypothesis of learning‐by‐import-

ing (LBI, henceforth), that is to test whether importing intermediates results in an increase in firms'

productivity. If importing firms have access to a wider variety of intermediate inputs and/or to higher

quality inputs and, therefore, may benefit from the diffusion and adoption of new technologies and

knowledge embodied in imported inputs, this can result in productivity increases. The empirical evi-

dence for the LBI hypothesis, using firm‐level data, is mixed. Van Biesebroeck (2008) using Colombian

data finds that productivity growth is correlated more strongly with firm's export status than with the

use of imported inputs; and, similarly, Muendler (2004) finds a small contribution of foreign materials

and investments goods on output for Brazil. In contrast, Kasahara and Rodrigue (2008),5 Amiti and

Konings (2007) and Halpern, Koren, and Szeidl (2015) find that importing intermediates has a posi-

tive effect on firms' productivity for Chile, Indonesia and Hungary, respectively.6

Only a few empirical studies examine simultaneously the effects of importing intermediates

and exporting on productivity at the microlevel. Among them, it is worth mentioning Kasahara and

Lapham (2013), who devise a model with heterogeneous final good producers who simultaneously

choose whether to export their output and to use imported intermediates. They estimate a structural

model with Chilean plant‐level data that confirms that there are aggregate productivity and welfare

gains due to trade in both final goods and intermediates.

We aim to contribute to this strand of the international trade literature carrying out a joint robust

test both for the LBE and LBI hypotheses. To fulfil this task, we follow De Loecker (2013) to estimate

total factor productivity (TFP henceforth). We use a procedure based in the control function approach

framework to estimate TFP, although we consider a more general law of motion of productivity as we

allow past export and import experience to affect future productivity. Then, we use this estimated TFP

as dependent variable of an equation in which we test for LBI and LBE while explicitly recognising

the existence of state dependence (persistence) on productivity.

As mentioned above, the third strand of the literature we aim to contribute is on the analysis of the

impact of firms' trading strategies on markups (defined as the ratio of price to marginal cost). Both im-

porting intermediates and exporting may have an impact on firms' markups through the marginal cost

and/or the price channel. As for the marginal cost channel for exports, if the LBE mechanism operates

(so exporting firms become more efficient) and there is not full pass through to prices of the marginal

cost reduction, the result will be an increase in markups. Furthermore, if a necessary condition to be

competitive in international markets is the production of higher quality differentiated products, this

may result in a potential reduction in the demand price elasticity of the exporters' portfolio of products

that will allow them to increase prices and enjoy higher margins (price channel). With respect to the

marginal cost channel for imports, if importing inputs allows reducing production costs and there is

not full pass through to output prices, the result will be an increase in markups. Moreover, if firms

5 Kasahara and Rodrigue (2008), when estimating total factor productivity consider an endogenous Markov process for the

law governing the evolution of productivity in which past import experience may affect future productivity.

6 There are other studies (using cross‐country data) that find that importing intermediate goods (that embody technology)

increases firm productivity, such as Coe and Helpman (1995) and Coe et al. (1997).