Trade shocks and productivity growth with heterogeneous firms: Foreign ownership and the African experience

As the world becomes increasingly interdependent, international trade has become progressively more important to the growth and survival of domestic industries. In this dissertation, I study the intra-industry dynamics of Sub-Saharan African manufacturing industries in the face of trade shocks. I argue that within the region, foreign-owned firms are less credit constrained and so can adapt to new market conditions more easily than domestically-owned firms. I build a theoretical model to explain how foreign ownership affects intra-industry resource reallocations within Sub-Saharan African industries after a trade shock. I also examine the productivity growth effects due to exporting within or outside Africa. I then test hypotheses from the model using a panel of firm-level data from four African countries. 1 test for the existence of foreign ownership effects on firm productivity growth, and whether foreign ownership differentially affects firm productivity in the face of a trade shock. The empirical shock is the African Growth and Opportunity Act (AGOA), implemented after the year 2000.;I find that foreign ownership positively and significantly affects firm productivity growth both before and after the trade shock. There also exist positive and significant spillover effects from the percentage of foreign ownership in an industry, but these appear only after the trade shock. As expected, exporting has positive and significant effects on firm productivity growth, but the effects vary by destination of exports. I test the validity of the results by means of a range of robustness checks.;Allowing for heterogeneous firms (and thus for divergent responses to trade shocks) uncovers a welfare story not captured in current theory. Foreign-owned firms are better-placed to exploit conditions of more open trade. If they expand, then the consequent reallocation of labor and other resources to the more productive firms could mean that on average, domestic firms actually lose from the trade shock. On the other hand, when trade is more open there is evidence of increased productivity spillovers from foreign-owned to domestic firms. Given that more than 80% of firms in the sample are domestically owned, the dominance of one effect or the other could have profound implications for their future growth and technological dynamism---and, if the sample is representative, for African manufacturing industry as a whole.