Trade Costs and Business Dynamics in U.S. Regions and Industries

Download or read book Trade Costs and Business Dynamics in U.S. Regions and Industries written by Qian Wu and published by . This book was released on 2012 with total page 141 pages. Available in PDF, EPUB and Kindle. Book excerpt: Firms' participation in exporting or foreign direct investment is an extremely rare behavior: only 4 percent of over 5.5 million U.S. firms were exporters in 2000. Exporters are generally larger (e.g. output and employment) and more productive than firms serving only domestic markets. Such heterogeneity within a narrowly defined industry cannot be fully explained by either comparative advantage arguments or the presence of scale economies and consumers' love of variety. Recent studies of heterogeneous firms show that a reduction in trade costs, i.e. policy, geographic and institutional barriers, has two effects within an industry previously not recognized in trade literature: (i) exit of low productivity firms, and (ii) resource reallocation in favor of high productivity firms. These two effects combine to raise an industry's average productivity and overall welfare, but can adversely affect some regions of an economy with firm closures or job losses. The objective of this dissertation is to examine the effects of trade costs on firm entry, exit, and employment at a regional level in the United States. For this purpose, industry-specific trade costs by U.S. regions are derived and their underlying sources are examined. The chosen trade-costs measure, based on the gravity equation, captures the variation over time in trade fictions among countries. Data from the Census Bureau and the World Bank are employed to quantify trade costs by U.S. industries and regions. Results show that a single measure of trade costs for the United States does not adequately represent the large number of and diverse regions through which trade in agriculture and manufacturing occurs. Moreover, geographic factors appear to be relatively more important than policy barriers in explaining the level of trade costs faced by U.S. regions. Drawing on recent heterogeneous firms models, this dissertation specifies an empirical framework to examine: (i) firm entry or exit arising from changes in trade costs, i.e. extensive margin, and (ii) changes in employment of surviving firms creation arising from changes in trade costs, i.e. intensive margin. These two hypotheses are tested using regional business dynamics data from the Census Bureau and trade cost measures derived earlier. Results show that trade cost changes affect firm exit and employment as hypothesized. That is, lowering trade costs increases the likelihood of firm exit, presumably of the low-productivity ones. Thus, trade costs, by way of the extensive margin, affect an industry's average productivity. Similarly, trade costs appear to affect the employment of surviving firms suggesting that the intensive margin also operates to improve average productivity of an industry, such as through resource reallocation towards high-productivity firms. The intra-industry reallocation of resources to high productivity firms is an important source of gains from trade to the whole economy. Nonetheless, some regions face firm exit and job losses. In assessing the gains from trade, attention must be paid to the distributional consequences of resource reallocation within an industry as well as a country.