Product Restructuring, Exports, Investment, and Growth Dynamics

Abstract

This paper estimates a dynamic general equilibrium model of entry, exit, and endogenous productivity growth. Productivity is endogenous both at the industry level (firms enter and exit) and at the firm level (firms invest in productivity-enhancing activities). The focus of the paper is on two activities that make productivity-enhancing investments more attractive, namely, exporting and product-mix choices. A firm that increases its exports and/or its number of products will have higher sales – and this makes investing in productivity more attractive because there are more units (sales) across which the productivity gains can be applied. These insights are taken to firm-level Spanish data. We compute the Markov Perfect Equilibrium using dynamic programming algorithms and estimate the dynamic parameters using Bayesian MCMC. Three key findings emerge. First, there is no evidence of learning by exporting: the observed positive correlation between exporting and productivity operates entirely via the impact of exporting on productivity-enhancing investments. Restated, exporting decision raises productivity, but only indirectly by making investing in productivity more attractive. Second, there is evidence of learning by producing multiple products: product-mix raises productivity directly in addition to the investment channel. Third, there are strong complementarities among the product-mix, exporting and investment decisions. Finally, I simulate the effects of a 5% reduction in the iceberg transportation costs. Productivity rises at the economy-wide level both because of the between firm reallocation effect and because of within firm increases in productivity.

Keywords: Heterogeneous Firms, Endogenous Product Range, Dynamic Discrete Games, Continuous Games, Entry, Exit, and Growth in Monopolistic Competition

JEL Classification: F12, F13, F14, L11