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Import-push or export-pull? An industry-level analysis of the impact of trade on firm exit

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Abstract

Does the selection effect of trade work solely through competition from imports, or does the export market further contribute to firm selection? This paper provides a re-interpretation of the different mechanisms in terms of selection on profitability—rather than productivity—and derives novel predictions regarding the export market and the role of product differentiation. Empirical results for a sample of Danish manufacturing industries confirm the import-“push” hypothesis as well as the export-“pull” hypothesis, but also reveal differences across industries. The selection effect of trade is mainly driven by the “import-push” if product differentiation is high, whereas it is driven by the “export-pull” if goods are homogeneous.

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Notes

  1. In line with out results, Emami Namini et al. (2011) also find evidence of export-induced factor market competition. But in contrast to that study, our analysis centers on the differential role of export and import openness.

  2. Pflüger and Russek (2011) and Felbermayr and Spiegel (2012) introduce firm heterogeneity in the probability of exit into the Melitz (2003) framework. In Pflüger and Russek (2011), firms are heterogeneous in productivity and exit probabilities are inversely related to firm productivity. To the contrary, in Felbermayr and Spiegel (2012) firms differ only in their per period exit probability. In both papers, firm-specific exit probabilities are therefore entirely determined by exogenous factors. In Schröder and Sørensen (2012), exogenous technological progress generates endogenous exit decisions of firms. To the contrary, we highlight how a firm’s probability of exit evolves over time as profits change.

  3. With f ii  > 0, setting π ii (k) equal to zero would imply a zero profit cut-off for domestic production. Opportunity costs to remaining active, which are implicit in our specification for exit, are however theoretically equivalent to fixed per period production costs (Hopenhayn 1992). Letting f ii  > 0, the firm-specific exit probability in (1) could similarly be motivated by introducing heterogeneity in fixed costs.

  4. This is the implicit hypothesis in Melitz and Ottaviano (2008). From an empirical perspective, expansion of exporting firms leaves wages unaffected if industry employment increases correspondingly, e.g. through a fall in unemployment.

  5. Moreover, if σ is small changes in foreign cost variables have a higher impact on the number of imported varieties; see the discussion below.

  6. The elasticity of substitution reflects the toughness of competition in the sense that competition increases the profits of a more efficient firm, relative to a less efficient firm; see Boone (2008). Sutton (2007) reviews the literature on the determinants of market structure and highlights the paradoxical result that an increase in competition may actually induce an increase in concentration.

  7. The within-industry heterogeneity in firm size (sales) is determined jointly by the elasticity of substitution and the (unobserved) heterogeneity in productivity; see Eaton et al. (2011). Our predictions regarding inter-industry differences in market structure, to the contrary, hold for a given distribution from which firms draw their productivity. With industry-level data, we are not in a position to identify this second determinant of market structure. We therefore have to disregard the productivity distribution as an additional factor that qualifies the impact of trade on firm exit. Our analysis is still valid as long as (1) both factors are not systematically related, and (2) product substitutability is partly reflected in differences in market structure. The latter claim is supported by the empirical evidence in Sect. 4.2

  8. If there is a minimum level of profits that needs to be obtained in order to make operating attractive, given a change in profits smaller firms are more likely to fall below this minimum threshold.

  9. Our formulations differ slightly from Chaney (2008), since we do not impose global equilibrium.

  10. Note that the industry and firm characteristics shaping firm exit by merger/acquisition or industry switching may differ from those determining exit via close-down; see Bernard et al. (2006) and Greenaway et al. (2008).

  11. We use the VAT statistics as a source of information on exports rather than Eurostat data, because in the latter we are confined to determine industry-wide exports based on the industry affiliation of the product code, rather than the industry affiliation of the firms.

  12. Exports to the EU 24 are constructed by multiplying aggregate exports to all markets with the share of exports to the EU 24 in overall exports.

  13. A caveat to this approach is that with oligopolistic firms, two-way trade may occur even in homogeneous products (Brander and Krugman 1983). However, the Grubel-Lloyd index is highly negatively correlated with measures of industry concentration. It therefore seems implausible that intra-industry trade is driven by the oligopolistic behavior of firms.

  14. At the CN 8-digit level, trade imbalances are extremely common and not necessarily related to product differentiation, so we revert to the 4-digit level of the product classification when constructing the index. Note also that at this level of disaggregation, sourcing of intermediates and re-export of final goods are recorded in different product categories.

  15. The index is given by 1 − ∑ N n=1 s 2 n , where s n is the share of product n in overall industry imports and exports.

  16. If entry depends on trade exposure, entry is a “bad control” variable because it was not fixed at the time trade exposure was determined; see Angrist and Pischke (2009).

  17. Bernard and Jensen (2007) employ the minimum of industry-level entry and exit rates as a measure of sunk costs. They note that, if all industries were in steady state, the industry entry rate would be a good proxy for sunk costs. In reality, some industries are expanding and others are contracting, which is captured by our measure of industry growth.

  18. The Poisson Pseudo Maximum Likelihood estimator is preferred to log-linearization of the model and estimation by Ordinary Least Squares because (1) the dependent variable may take on the value zero and because (2) in the presence of heteroskedasticity information on \(E[\ln exit|\cdot]\) does not allow to gather any information on \(E[exit |\cdot]\) (Santos Silva and Tenreyro 2006). Robustness analysis employing the negative binomial model confirmed all of our results. With few clusters, the underlying asymptotic theory for obtaining cluster-robust standard errors does not apply. We therefore report the robust estimate of the standard error. Results are, however, robust to clustering at the industry level.

  19. Results show that the elasticity of the count of firm exits with respect to the number of firms is significantly different from one. Hence, taking the exit rate as dependent variable would be inappropriate for the data at hand.

  20. We use the average industry wage as a proxy for skill intensity. The export-“pull” works via wage increases and the instrument is therefore suspect at first sight. In a more realistic set-up with different types of labor inputs, we expect cross-industry differences in wages to be driven by differences in input intensities rather than by differences in the toughness of competition for labor inputs.

  21. The correlation coefficient between Imp and Exp (1) (Exp (2)) is 0.75 (0.13).

  22. Bernard et al. (2006) argue that the substantial increase in the IV coefficients may be due to non-classical measurement error in import penetration.

  23. Data on 4-firm concentration ratios and the Herfindahl-Hirschmann Index is retrieved from Statistics Denmark. Measures of industry concentration are only meaningful at higher levels of disaggregation, and therefore not available at the level of aggregation of the business demography data. We therefore take the unweighted average of the CR4 ratio (the Herfindahl-Hirschmann index) in the sub-industries that are matched to each of our 31 manufacturing industries. This aggregation problem needs to be borne in mind when interpreting the figures. Data on the share of small firms is from Eurostat’s Structural Business Statistics for the industries as listed in Table 5, except for Publishing of newspapers and Publishing activities, excluding newspapers. Firms are classified as small if they have less than 20 employees.

  24. Figure 3a, b are based on column (3) of Table 3. Figure 3c is based on column (4) of Table 3. Figure 4a, b are based on column (7) of Table 3. Figure 4c is based on column (8) of Table 3.

  25. Potentially, interactions between the three instruments and the proxy for σ h offer three additional instruments. However, we excluded the interaction with “bulkiness”, since this resulted in a better fit in the first stage regressions.

  26. Results are also robust to directly controlling for industry concentration.

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Authors and Affiliations

  1. Department of Economics and Business, Aarhus University, Fuglesangs Allé 4, 8210, Aarhus V, Denmark

    Ina Charlotte Jäkel

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  1. Ina Charlotte Jäkel
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Correspondence to Ina Charlotte Jäkel.

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This paper has benefited from the useful comments of two anonymous referees. I am grateful to Ingo Geishecker, Sourafel Girma, Dimitra Petropoulou, Hans-Jörg Schmerer, Philipp Schröder and Valdemar Smith for helpful comments and suggestions. Thanks are also due to seminar and conference participants at universities in Aarhus, Göttingen and Stockholm as well as at the Leverhulme Center for Research on Globalisation and Economic Policy and ZEW Mannheim. Financial support from the Tuborg Foundation is gratefully acknowledged.

Appendix

Appendix

This appendix provides a complete list of the sectors and industries used in the empirical analysis; see Table 5.

Table 5 Sector and industry classification
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Jäkel, I.C. Import-push or export-pull? An industry-level analysis of the impact of trade on firm exit. Empirica 41, 747–775 (2014). https://doi.org/10.1007/s10663-013-9235-x

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