The Better You Are the Stronger It Makes You : Evidence on the Asymmetric Impact of Liberalization
This paper studies how liberalization affects productivity growth using micro-level plant data. While previous studies have already shown the existence of a positive relationship between competition and economic performance, the novelty of this pap...
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| Format: | Policy Research Working Paper |
| Language: | English |
| Published: |
2012
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| Online Access: | http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20090513134707 http://hdl.handle.net/10986/4124 |
| Summary: | This paper studies how liberalization
affects productivity growth using micro-level plant data.
While previous studies have already shown the existence of a
positive relationship between competition and economic
performance, the novelty of this paper is that it analyzes
not only the average impact of liberalization, but also goes
"beyond the average" and shows how the
liberalization can affect dissimilar plants in a different
way. The author first develops a model which predicts that,
while the impact of liberalization on productivity growth is
positive "on average", more advanced firms tend to
benefit more. In fact, liberalization generates two
competing effects: on one side it spurs more innovative
efforts because of the increased entry threat by foreign
competitors, on the other side, enhanced competition
curtails expected profits and reduces the funds available to
finance innovative activities. The pro-competitive effect is
weaker for less advanced firms as for them it is harder to
catch-up with the "technology frontier". These
predictions are then tested focusing on Mexican plants
during the NAFTA liberalization. The results show that a 1
percent reduction in tariffs spurred productivity growth
between 4 and 8 percent on average. However, for backward
firms this effect is much weaker if not close to zero,
otherwise for more advanced ones this effect is stronger
with productivity growing between 11 and 13 percent.
Consistent with the theoretical model the results are
stronger in those sectors where the scope for innovative
activities is more pronounced. These results are
particularly important for policy makers because they
suggest that while increasing competition may be good in
spurring average productivity, it is also true that this
effect does not hold for all type of firms, in particular
more backward firms may need some complementary support
policy to upgrade their capacities and keep up with the more
competitive environment. |
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