Trade Liberalization: Export-Market Participation, Productivity Growth and Innovation

Abstract

The paper examines how Canadian manufacturing plants have responded to reductions in tariff barriers between Canada and the rest of world over the past two decades. Three main conclusions emerge from the analysis. First, trade liberalization was a significant factor behind the strong export growth of the Canadian manufacturing sector. As trade barriers fell, more Canadian plants entered the export market and existing exporters increased their share of shipments sold abroad. Second, export-market participation was associated with increases in a plant's productivity growth. Third, our analysis identified the presence of three main mechanisms through which export-market participation raises productivity growth among plants: learning by exporting; exposure to international competition; and increases in product specialization that allowed for exploitation of scale economies. Our evidence also shows that plants that move into export markets increase investments in R&D and training to develop capacities for absorbing foreign technologies and international best practices. Finally, entering export markets leads to increases in the number of advanced technologies being used, increases in foreign sourcing for advanced technologies and improvements in the information available to firms about advanced technologies. It is also associated with improvements in the novelty of the innovations that are introduced.

Keywords: tariff reduction, export participation, productivity growth and innovation

JEL Classification: O33, O47, D24, J24