Trade Openness And Productivity In Developing Countries

The report of18th CPC National Congress has pointed out that in response to changesin both domestic and international economic developments we should speed up thecreation of a new growth model and ensure that development is based on improvedquality and performance. Under the new international situation, it is quite important fordeveloping countries to expand trade openness, improve productivity and promotelong-term economic growth. This paper analyzed the evolution process of productivityand trade openness theory, used macro data, industry data and micro data respectively,and discussed the effect of trade openness to productivity from the perspective of tariffbarrier, non-tariff barrier, trade penetration and firm activity. The methods we used inthis paper include normative research, empirical research, simulation analysis andregression analysis, and we preceded our discussion by country level, industry leveland firm level.In the country level, according to the research of Restuccia and Rogerson (2008)and Hsieh and Klenow (2009), factor misallocation is one of the most importantsources of total factor productivity differences between countries. We used this theoryand the model of international trade and resource misallocation developed by Ferreiraand Trejos (2011) to study developing countries. We introduced two indicators namedtariff cost and non-tariff comprehensive cost in order to measure trade cost and toanalyse how trade openness and trade cost impact the productivity differences betweencountries. Based on the trade cost data supplied by Economic and Social Commissionfor Asia and the Pacific Comprehensive Trade Cost Database, this paper took themethod of simulation analysis to investigate80developing countries by using dataabout the year2005. The results showed that trade can improve the level of outputgiven input, which enabled countries benefit from trade. The existence of trade barrierscaused the distortion of resources allocation among sectors and weakened gains fromtrade. Most developing countries can still realize their output increase from trade in thecase of considering tariff barriers only. However, after taking non-tariff trade barriersinto account, many countries wasted quite a number of trade benefits. Trade opennesscould reduce total factor productivity gap between developing countries and developedcountries but this effect would be weakened due to the existence of trade barriers. In the industry level, we introduced the theoretical model developed by Melitzand Ottaviano (2008) and empirical model developed by Chen et al.(2009) to thestudy of developing countries. Based on the industry level data supplied by CEPIIdatabase, we examined of the effect of trade openness to labor productivity ofdeveloping countries in industry level by using the data of26manufacturing industryfrom the year1981to the year2006. We used the methods of OLS estimation, fixedeffect model and first-order difference estimation, respectively, and found thatdomestic trade openness increased domestic productivity, while foreign openness actedto diminish it. The domestic relative trade openness to foreign had a positive impact ondomestic relative productivity. The results are consistent with theoretical model andpassed the robustness test. The results suggested that the improvement of tradeopenness in developing countries introduced more foreign firms to domestic market,which increased the product variety in domestic market and promoted domesticcompetition. The competition increased average productivity. Hence, trade openness indeveloping countries presented competition effect to domestic market and had apositive impact on the improvement of domestic industrial relative productivity, thereduction of productivity gap with the developed countries and the enhancement ofdomestic industrial competitiveness.In the firm level, we used Levinsohn-Petrin method to estimate the total factorproductivity of enterprises. Levinsohn-Petrin method is useful to solve the simultaneityproblems caused by the correlation of inputs and productivity shocks in micro data andto recover the disadvantage of Olley-Pakes method because Olley-Pakes method couldestimate total factor productivity of enterprises only when they have continuousinvestment. We also used two other indicators to measure productivity. One is totalfactor productivity calculated by fixed effect model and the other one is laborproductivity calculated by added value per worker. We introduced two indicators tomeasure trade openness named port cost, which means the cost of transporting a20-foot container cargo from the city that enterprise located to the port designated bythe Institute of Comprehensive Transportation, and port distance, which means thegreat circle distance from the city that enterprise located to the nearest major port. Weclassified the whole sample of enterprises to four categories according to their trade status. They are enterprises that only export, enterprises that only import, enterprisesthat engaged in both export and import, and enterprises that do not engaged ininternational trade. We controlled the other determinants of enterprise productivity,such as management ability, staff’s quality, salary incentive, utilization of informationtechnology, research and development, employee training and decision-makingstructure. We examined the effect of trade openness and trade status to enterpriseproductivity based on the data of nearly12000manufacturing enterprises in China’s120large and medium-sized cities in the year2004.The results showed that trade openness in the city that enterprise located had apositive impact on enterprise’s total factor productivity and labor productivity. Thereduction of comprehensive transport costs and the decrease of port distance wouldimprove enterprise’s total factor productivity and labor productivity. The resultsmaintained significant after controlling for the enterprise trade status, enterprisecharacteristics and other determinants of enterprise productivity. Meanwhile,comprehensive transport costs are an important part of the non-tariff trade costs. Whenwe controlled for all of the other determinants of enterprise productivity, the effect ofcomprehensive transport costs to enterprise productivity was more than twice of theeffect of port distance. This conclusion maintained robust when we usedLevinsohn-Petrin method to calculate total factor productivity, fixed effect model tocalculate total factor productivity and added value per worker to calculate laborproductivity. The conclusion suggests that non-tariff trade costs are a significant barrierto productivity growth and the reduction of non-tariff trade costs, especially thereduction of comprehensive transport costs, are quite important for enterpriseproductivity improvement. In addition, among the determinants that could positivelyaffect enterprise productity, the ratio of bonus to employee wages, the education levelof employees and the percentage of workers who often use computer to work have themost significant roles. The percentage of workers who had participated in informationtechnology training and the degree of general manager’s annual income relating to thecompany’s performance also has important effect. This conclusion suggests thatemphasizing the performance motivation of managers and employees, improvingemployees’ education quality and information technical ability, and enhancing the career training inside firms are quite important to enterprise productivity.This thesis mainly contributes to the existing literature as follows:(1) The research of Restuccia and Rogerson (2008) and Hsieh and Klenow (2009)pointed out that factor misallocation is one of the most important sources of total factorproductivity differences between countries. This point of view has been widely appliedto the studies about productivity differences between countries. However, mostresearches analyzed factor misallocation and productivity differences by using closedeconomy model, and the research that applied this theory to trade openness is verylimited. This paper followed the theory of factor misallocation and productivitydifferences, and introduced the open economy model developed by Ferreira and Trejos(2011) to study developing countries. We have not found the relevant domesticliterature that had discussed on this issue.(2) Melitz and Ottaviano (2008) constructed the trade model with heterogeneousfirms from the perspective of trade openness inducing product market competition.Chen et al.(2009) transferred the theoretical model to empirical analysis andinterpreted the international differences in industrial productivity by the internationaldifferences in trade openness. We introduced the theoretical model developed byMelitz and Ottaviano (2008) and empirical model developed by Chen et al.(2009) tothe study of developing countries in the industry level research, which extended theapplication of theory. We have not found similar domestic literature on this issueaccording to our investigation.(3) The existing literature about trade openness is generally focusing on the effectof tariff reduction to productivity. However, as tariff rates have been significantlyreduced in worldwide, non-tariff barriers become the major impediment ofinternational trade. In recent years, researchers pay great attention to the topic ofnon-tariff trade barriers, but the investigation of the relationship between non-tariffbarriers and productivity is scarce. In this thesis, we analyzed the effect of non-tarifftrade cost to productivity in developing countries systematically. To be specific, weexplored non-tariff cost data provided by ESCAP comprehensive trade cost database inmacro level and explored comprehensive transportation cost in China InvestmentClimate Survey provided by World Bank in micro level. This is the first time in domestic research.(4) The estimation of exports’ impact on productivity will be biased if one do notconsider the import activity of enterprises and the same thing happens when oneestimates the imports’ impact on productivity. Hence, it is necessary to provide acomplete view of trade by grouping firms according to their exposure to foreignmarkets. Such detailed analysis is scarce in the trade literature and is mainly aboutdeveloped countries. This thesis classified the whole sample of enterprises into fourcategories according to their trade status. They are enterprises that only export,enterprises that only import, enterprises that engaged in both export and import, andenterprises that do not engaged in international trade. We controlled the otherdeterminants of enterprise productivity, such as management ability, staff’s quality,salary incentive, utilization of information technology, research and development,employee training and decision-making structure to examine the effect of tradeopenness and trade status on China’s manufacturing enterprise productivity. This is thefirst time in domestic research.