Comparative Advantage, Multi-Product Firms and Trade Liberalisation: An Empirical Test

National Bank of Belgium Working Paper No. 219

65 Pages Posted: 23 Jan 2012

See all articles by Catherine Fuss

Catherine Fuss

National Bank of Belgium

Linke Zhu

Catholic University of Leuven (KUL) - Faculty of Business and Economics, LICOS

Date Written: January 1, 2012

Abstract

This paper investigates how economies of scope in multi-product firms interact with comparative advantage in determining the effect of trade liberalization on resource reallocation, using Belgian manufacturing firm- and firm-product-level data over the period 1997-2007. We first provide evidence on industry integration induced by multi-product firms producing simultaneously in multiple industries and on the extent to which industry integration occurs between industries that have different degrees of comparative advantage. We then examine the impact of opening up trade with low-wage countries on both inter- and intra-industry resource reallocation, taking into account heterogeneity in the integration rate across sectors and industries. Our results indicate that, within more closely integrated sectors, trade liberalisation with low-wage countries leads to less reallocation from low-skill-intensity (comparative-disadvantage) industries to high-skill-intensity (comparative-advantage) industries, both in terms of employment and output. We also find that more integrated industries experience less skill upgrading after trade liberalization with low-wage countries. Furthermore, we find that within sectors with a low integration rate, trade liberalization with low-wage countries induces relatively more aggregate TFP and average firm output growth in comparative-advantage industries than in comparative-disadvantage industries, in line with the prediction of Bernard, Redding and Schott (2007), while the opposite is true in highly integrated sectors. Decomposition of the industry-level aggregate TFP changes reveals that the result is mainly driven by reallocation between incumbent firms within industries. Overall, the results are highly consistent with the predictions of the Song and Zhu (2010) model.

Keywords: trade liberalisation, industry integration, comparative advantage, firm heterogeneity, microeconomic panel data, Total Factor Productivity

JEL Classification: F11, F12, F14, L23

Suggested Citation

Fuss, Catherine and Zhu, Linke, Comparative Advantage, Multi-Product Firms and Trade Liberalisation: An Empirical Test (January 1, 2012). National Bank of Belgium Working Paper No. 219, Available at SSRN: https://ssrn.com/abstract=1990313 or http://dx.doi.org/10.2139/ssrn.1990313

Catherine Fuss (Contact Author)

National Bank of Belgium ( email )

Brussels, B-1000
Belgium

Linke Zhu

Catholic University of Leuven (KUL) - Faculty of Business and Economics, LICOS ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

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