Trade Sides or Trade Modes: What Matters for Productivity Sorting of International Traders? Evidence from Latin American Countries

Abstract

In this paper, we complement the empirical evidence on the productivity sorting literature by considering different modes of import combined with different modes of export. Using the data of six Latin American countries, we test the first-order stochastic dominance to evaluate the Total Factor Productivity (TFP) differences among eight categories of traders. Our main result shows that, rather than the side, it is the mode of trade that matters. We show that the most productive firms choose to trade directly. In addition, firms that are both importers and exporters are more productive than firms active just on one side of the international market. Provided that the mode of trade is the same, firms that just import do not differ from those that just export. Similarly, we did not find a significant productivity difference between firms trading directly on one of the two trade sides and indirectly on the other. Thus, we concluded that direct two-way traders have the highest TFP, followed by direct one-way traders and then mixed two-way traders, indirect two-way traders, and, finally, indirect one-way traders.

Keywords: TFP, Productivity Sorting, Direct and Indirect Trade, Import, Export, Stochastic Dominance

JEL Classification: D22, F14, O31