Heterogeneous Firm-Level Responses to Trade Liberalisation: A Test Using Stock Price Reactions

This paper presents novel empirical evidence on key predictions of heterogeneous firm models by examining stock market reactions to the Canada-United States Free Trade Agreement of 1989 (CUSFTA). Using the uncertainty surrounding the agreement's ratification, I show that the pattern of abnormal returns of Canadian manufacturing …firms was broadly consistent with the predictions of a class of models based on Melitz (2003). Increases in the likelihood of ratification led to stock market gains of exporting firms relative to non-exporters. Moreover, gains were higher in sectors with larger cuts in U.S. import tariffs. Decreases in the likelihood of ratification led to opposite stock market reactions. Results for the impact of Canadian tariff reductions are less conclusive but most specifications suggest that exporters also gained relative to non-exporters in response to such reductions. Translating stock market gains into implied profit changes, I find that CUSFTA increased expected per-period profits of exporters by around 6-7% relative to non-exporters.Heterogeneous firm models, stock market event studies, Canada-U.S. free tradeagreement

Trade Liberalization and Industrial Restructuring through Mergers and Acquisitions

This paper analyzes mergers and acquisitions (M&A) as a previously neglected channel of industrial restructuring in the face of trade liberalization. Using the Canada-United States Free Trade Agreement of 1989 as a natural experiment, I show that trade liberalization leads to a significant increase in M&A activity. I also provide evidence that resources are transferred from less to more productive firms in the process and that the magnitude of the overall transfer is quantitatively important. Taken together, these results suggest that M&A is an important alternative to the previously studied adjustment channels of firm and establishment closure and contraction. This has strong implications for the design of competition policy in the wake of trade liberalizations since M&A may offer a more efficient way of transferring resources than contraction and closure of low productivity firms combined with internal growth of more efficient firms.Mergers and Acquisitions, Trade Liberalization, International Trade, CUSFTA

Trade Liberalization and Industrial Restructuring through Mergers and Acquisitions

This paper analyzes mergers and acquisitions (M&A) as a previously neglected channel of industrial restructuring in the face of trade liberalization. Using the Canada-United States Free Trade Agreement of 1989 as a source of exogenous variation in trade barriers, I show that trade liberalization leads to a significant increase in M&A activity. I also provide evidence that resources are transferred from less to more productive firms in the process and that the magnitude of the overall transfer is quantitatively important. Taken together, these results suggest that M&As are an important alternative to the previously studied adjustment channels of firm and establishment closure and contraction. This has strong implications for the design of competition policy in the wake of trade liberalizations since M&As may offer a more efficient way of transferring resources than contraction and closure of low productivity firms combined with internal growth of more efficient firms.

Trade Liberalization and Heterogeneous Firm Models: An Evaluation Using the Canada - US Free Trade Agreement

We examine the qualitative and quantitative predictions of a heterogeneous firm model à la Melitz (2003) in the context of the Canada - US Free Trade Agreement (CUSFTA) of 1989. We calibrate our model to the pre-trade liberalization stage, simulate the trade liberalization, and compute the resulting growth rates of Canadian industry productivity, exports and imports. We compare them with Trefler's (2004) estimates of the effects of CUSFTA. Our results show that our model performs well in replicating the qualitative aspects of Trefler's results. In particular, we correctly predict that US tariff cuts have smaller productivity enhancing effects than Canadian tariff reductions due to the entry of less efficient exporters. Quantitatively, the model tends to underpredict the impact of CUSFTA on growth rates of productivity, but overpredicts the increase in Canadian exports and imports. We discuss how liberalization-induced changes in the firm-level productivity distribution can reconcile the model with the evidence.Heterogeneous firm models, trade liberalization, CUSFTA, empirical evaluation

Service Traders in the UK

We provide a novel set of stylized facts on firms engaging in international trade in services, using unique firm-level data on services exports and imports in the United Kingdom in 2000- 2005. Less than 10% of firms trade in services but they can be found in all sectors of the UK economy. While the services sector accounts for 80% of total exports and imports, the frequency and trade intensity of services traders is often higher in sectors such as high- tech manufacturing. Services traders are bigger, more productive and are more likely to be foreign owned or part of a multinational enterprise. These 'trade premia' are smaller then for goods traders, however, with the exception of skill intensity which is higher among services traders. There are also significant differences between exporters and importers of services. Furthermore, we show that most firms only export or import a single service type and trade with a small number of countries. Trade volume, employment, turnover and value added are highly concentrated among a small group of firms trading with many countries and/or in many services types. These firms are characterised by bigger size and higher than average productivity, all of which seem to be principally correlated with more trade along the intensive margin (trade per services and country) .although there are a number of noteworthy exceptions. Interestingly, trade is also concentrated within .rms. The top export and import destination make up 70% of the average firm's total trade and the top services type around 90%. This strong concentration is still present among firms trading with many countries and/or in many products.International trade, services, firm-level evidence

Channels of Firm Adjustment: Theory and Empirical Evidence

We provide a comprehensive analysis of how firms choose between different expansion and contraction forms, unifying existing approaches from the industrial organization and corporate finance literature. Using novel data covering almost the entire universe of UK firms, we document firms� use of internal adjustment, greenfield investment and mergers and acquisitions (M&As). We describe frequency and aggregate importance of the different channels, and show that their use varies systematically with observable firm characteristics, in particular firm size and the magnitude of adjustment. We also demonstrate that there is positive assortative matching on the UK merger market. Based on these facts, we propose a theoretical framework which accommodates all three adjustment channels in a unified setting, and is able to replicate the adjustment and matching patterns found in the data.

Foreign Market Conditions and Export Performance: Evidence from Italian Firm-Level Data

A large body of literature in International Economics has analysed the impact of increased import competition on domestic firms. The link between firm-level exports and changes in the competitive environment on foreign markets is less well understood, however. This is despite the fact that exports make up a significant and growing share of total manufacturing production in most countries. We derive a theory-based econometric specification linking destination-specific exports to foreign demand and the degree of competitiveness or "crowdedness" of a foreign market. The latter is a summary measure of the number and productive efficiency of firms competing in a given market and the barriers impeding their access, such as tariffs or physical distance. We estimate this specification on a large sample of Italian manufacturing firms in 1992-2003 and use the results for a series of counterfactual experiments. Our findings indicate that increased numbers and efficiency of foreign firms and improvements in their access to destination markets have reduced Italian exports by around 0.2-0.4% per year. This is similar to the effects of tariff reductions for Italian firms (+0.3%/year) but smaller than the impact of higher unit labour costs (-1.4%/year) and less favourable exchange rates (-2.0%/year). By far the most important determinant of export performance was foreign demand growth, however, raising Italian exports by up to 5.3% per year or almost 60% over the sample period. Our results also indicate that China's impact on Italian export performance is small and if anything positive. Much more important in explaining the loss of export market shares in recent years has been the relatively slow demand growth in Italy's main export market, the EU15.

Foreign Market Conditions and Export Performance: Evidence from Italian Firm-Level Data

A large body of literature in International Economics has analysed the impact of increased import competition on domestic firms. The link between firm-level exports and changes in the competitive environment on foreign markets is less well understood, however. This is despite the fact that exports make up a significant and growing share of total manufacturing production in most countries. We derive a theory-based econometric specification linking destination-specific exports to foreign demand and the degree of competitiveness or “crowdedness” of a foreign market. The latter is a summary measure of the number and productive efficiency of firms competing in a given market and the barriers impeding their access, such as tariffs or physical distance. We estimate this specification on a large sample of Italian manufacturing firms in 1992-2003 and use the results for a series of counterfactual experiments. Our findings indicate that increased numbers and efficiency of foreign firms and improvements in their access to destination markets have reduced Italian exports by around 0.2-0.4% per year. This is similar to the effects of tariff reductions for Italian firms (+0.3%/year) but smaller than the impact of higher unit labour costs (-1.4%/year) and less favourable exchange rates (-2.0%/year). By far the most important determinant of export performance was foreign demand growth, however, raising Italian exports by up to 5.3% per year or almost 60% over the sample period. Our results also indicate that China’s impact on Italian export performance is small and if anything positive. Much more important in explaining the loss of export market shares in recent years has been the relatively slow demand growth in Italy’s main export market, the EU15.International Trade, Competition, Exporters, Foreign Markets

A Many-Country Model of Industrialization

We draw attention to the role of economic geography in explaining important cross-sectional facts which are difficult to account for in existing models of industrialization. By construction, closed-economy models that stress the role of local demand in generating sufficient expenditure on manufacturing goods are not suited to explain the strong and negative correlation between distance to the world's main markets and levels of manufacturing activity in the developing world. Secondly, open-economy models that emphasize the importance of comparative advantage are at odds with a positive correlation between the ratio of agricultural to manufacturing productivity and shares of manufacturing in GDP. This paper provides a potential explanation for these puzzles by nesting the above theories in a multi-location model with trade costs. Using a number of simple analytical examples and a full-scale multi-country calibration, we show that the model can replicate the above stylized facts.Industrialization, economic geography, international trade

The effect of trade liberalization on firm-level profits:an event-study approach

I use an event study approach to present novel evidence on the impact of trade liberalization on firmlevel profits. Using the uncertainty surrounding the negotiation and ratification process of the Canada- United States Free Trade Agreement of 1989 (CUSFTA), I estimate the impact of different types of tariff reductions on the abnormal returns of Canadian manufacturing firms. I find that Canadian import tariff reductions lead to lower, and reductions in Canadian intermediate input tariffs to higher abnormal returns. The impact of U.S. tariff reductions is less clear and depends on the size of the affected firms. I also calculate the total profit increase implied by my estimates. Overall, CUSFTA increased per-period profits by around 1.2%. This was mainly driven by intermediate input tariff reductions which more than offset the negative effect of Canadian import tariff reductions