Abstract
We examine simultaneously the effects of real-exchange-rate movements and tariff reductions on plant death in Canadian manufacturing industries between 1979 and 1996. Consistent with the implications of recent international trade models with heterogeneous firms, we find that the impact of exchange-rate movements and tariff cuts on exit is heterogeneous—particularly pronounced among least efficient plants. Our results further reveal multi-dimensional heterogeneity that current models featuring one-dimensional heterogeneity (efficiency differences among plants) cannot fully explain: exporters and foreign-owned plants have much lower failure rates; however, their survival rates are more sensitive to changes in tariffs and real exchange rates.
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Notes
See also Caves (1998) for a discussion of this process in other countries.
A number of studies (Head and Ries 1999; Fung 2008) have looked at how the scale of production is impacted by changes in exchange rates. Using a panel of 230 Canadian manufacturing industries between 1988 and 1994 Head and Ries (1999), find that the overall growth in average output per plant is due to undercounting of small establishments, changes in the industry composition, exchange-rate depreciation, and US tariff reductions. Fung (2008), however, finds that real currency appreciations lead to scale expansion of surviving firms in Taiwanese manufacturing plants Baggs et al. (2009). Examines the issue of exchange-rate and firm survival, but differs from this paper in terms of data, sample period, methodology and findings.
The main channel for the productivity gain is through the declining relative price of imported intermediates, generating substitution of intermediates for labour and therefore productivity gain among surviving plants. Reallocation is also important: the gain from exiting of less productive domestic producers partially offset by the loss due to reallocation of production away from the most productive firms (who lose export markets).
Previous work has found that at the industry level, correlations in tariff changes across the two countries are sufficiently high as to make it difficult to discern separate effects of reductions in tariffs in each country on structural changes in Canada (Baldwin et al. 2005).
Tariff data for 1980 are used for 1979.
We are grateful to Alla Lileeva for providing us with the tariff data. For details on the sources and construction of the tariff data, see the Appendix in Trefler (2004).
Over the study period, the ‘survey’ was essentially a census with data on smaller firms being filled with administrative records.
The survey data are derived from long-form questionnaires (often given to larger plants) and short-form questionnaires (often given to smaller plants). The long-form questionnaires contain much more detailed information than the short-form questionnaires. Implicit in our analysis is the assumption that small plants (who filled in the short-form questionnaires) are non-exporters. The assumption is reasonable. According to a 1974 survey that collected export data for all plants, only 0.4% of plants that filled in the short-form questionnaires reported exports (Baldwin and Gu 2003).
Plants that temporarily stop reporting data but shortly thereafter start doing so are not classified as plant deaths here.
We experimented with these two approaches. They produce exactly the same results if there were no interaction terms. With interactions, the two are almost the same but not quite. This is because most statistical programs such as STATA would not know, for example, that the independent variable \( \Updelta v_{it} z_{{pt_{0} }} \) is an interaction term between \( \Updelta v_{it} \) and \( z_{{pt_{0} }} \). Including a set of period and industry dummies in the case of Eq. (3) is equivalent to subtracting the mean of \( \left( {\Updelta v_{it} z_{{pt_{0} }} } \right) \) from the product of \( \Updelta v_{it} \) and \( z_{{pt_{0} }} \) \( \left( {\Updelta v_{it} z_{{pt_{0} }} } \right) \). This is not the same as the product of the demeaned \( \Updelta v_{it} \) and \( z_{{pt_{0} }} \), as it should be.
To be consistent with fixed-effects model, variables \( X_{it} \) is demeaned as follows: \( x_{it} = X_{it} - \overline{X}_{i} - \overline{X}_{t} + \overline{\overline{X}} \), where \( x_{it} \) is the demeaned \( X_{it} ,\;\overline{X}_{i} \), is the average for each two-digit industry i, \( \overline{X}_{t} \) is the average for each time period t, and \( \overline{\overline{X}} \) is the average of \( \overline{X}_{i} \) over all two-digit industries or the average of \( \overline{X}_{t} \) over all time periods.
Due to the skewed distribution of plants in terms of productivity and employment (many small and less productive plants and a few larger and very productive plants), the plots only include plants whose relative productivity and relative employment is within two standard deviations from their industry mean. This covers more than 98% of plants for Figs. 1, 2 and 3.
All variables are measured as deviations from industry means. For example, relative productivity has a mean value of one; for a plant whose productivity is twice as much as the industry average, its relative productivity is two and its deviation from the mean of relative productivity is one.
Marginal effects are calculated based on probit coefficients in Table 5, and evaluated at the two-digit industry mean values of all variables.
Predicted exit rates are evaluated at the common industry mean values of tariff cuts and real-exchange-rate changes, and at group-specific industry mean values of productivity, employment and age.
To compare how a given shock in tariffs cost and the exchange rate impacts differently upon exporters and non-exporters, we evaluate the marginal effects by holding changes in tariff cost and exchange rate constant across the two groups (evaluated at the common industry mean values).
An alternative is to obtain the average predicted exit rates over all observations. The two methods yield very similar results.
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Baldwin, J., Yan, B. The death of Canadian manufacturing plants: heterogeneous responses to changes in tariffs and real exchange rates. Rev World Econ 147, 131–167 (2011). https://doi.org/10.1007/s10290-010-0079-1
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DOI: https://doi.org/10.1007/s10290-010-0079-1