Nordic Conference on Development Economics Bergen, June 2013

1. Trinity College Dublin Trade liberalization, supply chains and productivity Nordic Conference on Development EconomicsBergen, June2013 Carol Newman, Trinity College Dublin John Rand, University of Copenhagen Finn Tarp, UNU-WIDER and University of Copenhagen

2. Overview of paper • Explore the relationship between trade liberalization and firm productivity using the case of Vietnam 2002-2010 • Focus on the impact of imported intermediates on firm productivity • Key contributions: • Focus on effects through the supply chain distinguishing between competition and productivity channels on import and non-import firms • Introduce a new measure of supply chain linkages that measures the extent of exposure of a sector to imports upstream using Supply Use Tables • Exploit differences in the effects in competitive and concentrated sectors and in the impact of imports into competitive and concentrated upstream sectors. • We explicitly investigate the technology transfer channel as a source of productivity growth for firms that import foreign inputs

3. Preview of results • We find no evidence of pure productivity improvements associated with importing intermediates post-WTO accession • We find some suggestive evidence of positive productivity impacts in the pre-WTO period that are likely attributed to higher quality imported inputs, more imported varieties or technology transfers. • We find evidence of reallocation effects among non-import firms with the least efficient exiting or beginning to import intermediates • Once trade is liberalized this source of productivity growth for importing firms disappears along with reallocation effects through this channel

4. Related Literature • Large empirical literature linking trade to productivity improvements at the industry and firm level: • Tybout et al. (1991), Pavcnik (2002), Eslava et al. (2004), Fernandes (2007) • Specific evidence for imported inputs as a channel for productivity growth provided by: • Kasahara and Rodrigue (2008) for Chile, Halpern et al. (2005) for Hungary, Goldberg et al. (2008) for India • Amiti and Konings (2007) for Indonesia and that gains are achieved through learning, variety and quality effects. • Some contradicting evidence provided by: • Van Biesebroeck (2003) no evidence that productivity improvements in Columbia are due the use of foreign inputs • Muendler (2004) limited effects of foreign inputs on productivity in Brazil.

5. Description of mechanisms • Assume that both upstream and downstream sectors are competitive. • An expansion of imports in upstream sectors will increase competitive pressures that will result in overall efficiency gains (Holmes and Schmitz, 2001; Amiti and Konings, 2007). • This will lead to a fall in the price of input for firms further along the supply chain. • An expansion of imported intermediates will lead to technology diffusion through greater variety, better quality inputs and new technologies embodied in those inputs (Grossman and Helpman, 1991). • These productivity effects will affect firms that import intermediates. • This in turn might increase competitive pressure on downstream non-import firms

6. Identification of mechanisms • Identification of effects is complicated by the fact that data only available on the value of inputs and outputs • Physical productivity cannot be estimated and so we must use a revenue based measures (see Foster et al, 2008). • Implication is that observed productivity changes will embody both within-firm physical productivity gains and changes in prices and/or mark-ups • We consider how the impact of an expansion of imports in upstream differs for competitive versus concentrated sectors • Focusing competitive sectors allows us to detect within-firm effects

7. Identification of mechanisms • Impact of decline in costs in upstream sectors: • In concentrated downstream sectors lower costs will lead to larger mark-ups as there will be no competitive pressures to erode costs. This will look like productivity improvements on a revenue based measure of productivity. • In competitive downstream sectors price competition will erode away any cost advantages. Should observe no change in measured productivity downstream through this mechanism.

8. Identification of mechanisms • Detecting productivity improvements through the availability of more variety, better quality inputs, or embodied technologies: • Can be isolated by testing whether importing firms in competitive sectors experience productivity improvements. • Upstream sectors will vary in how competitive they are. • Impact of imports on prices upstream will be more pronounced in competitive upstream sectors • An expansion of imports into concentrated upstream sectors is less likely to impact on the price of imports downstream Any observed productivity effects on firms in downstream sectors are likely to be associated with real productivity as opposed to competition effects.

9. Identification of mechanisms • Impact of productivity improvements experienced by competing import firms on non-import firms • Increased competitive pressures imply only the most efficient firms will survive. Least efficient will exit. Overall productivity will improve due to reallocation of resources toward more efficient firms (Melitz, 2003)

10. Empirical Approach • Step 1: Productivity measurement • Index Number approach - productivity measured relative to a reference point which we take as the mean level of productivity in a given sector in a given year • To analyse changes over time we chain link productivity differential to changes in the reference level of productivity from year to year

11. Empirical Approach • Step two: fixed effects regression • Regress productivity on a series of indicator variables that capture mechanisms • Also include an indicator of trade liberalization (accession to WTO) given that competition effects associated with an expansion in imports likely to be different under different trade regimes • Baseline:

12. Empirical Approach • Interact all import variables with sector-level measure of concentration: • Overall impact of change in imports into upstream sectors given by: • Main predictions: • Non-import firms No impact in competitive sectors: Reallocation effects in competitive sectors: • Import firms: No impact in competitive sectors: Productivity gains in competitive sectors:

13. Vietnamese Context • The opening up of the Vietnamese economy began in 1986 with the adoption of a range of policy measures under doimoi (renovation) in particular relating to trade liberalisation and the promotion of foreign direct investment (FDI) • Trade liberalization took the form of the removal of export taxes and non-tariff barriers and the negotiation of various trade agreements with ASEAN, the US and the EU which ultimately lead to WTO accession in 2007 • Significant growth in exports and imports over 2000s: • Steady growth in both is evident throughout the 2000s but in particular post WTO accession in 2007

14. Trade in Vietnam Source: General Statistics Office Vietnam, National Accounts

15. Data • Vietnamese Enterprise Survey collected annually by the GSO for 2002 to 2010 • Data gathered on population of all registered enterprises in Vietnam with 30 employees or more and representative sample of smaller firms • 47,556 firms over 10 year period totaling 141,262 observations • Export and import data at 4-digit level taken from COMTRADE • Supply Use Tables for Vietnam in 2007 to measure input-output linkages along the supply chain

16. Manufacturing firm characteristics

17. Measuring supply chain linkages • Vietnam Supply-Use Tables (SUT) for 2007 • The SUT maps the use of 138 commodities in 112 production activities • We link these production activities to the 4-digit ISIC codes used in the Enterprise Survey to produce 97 comparable sector codes • The SUT data are used to construct a sets of weights that captures upstream linkages between sectors, whereby for each sector i, their link with upstream sector j is the proportional contribution of output from sector jto its total input base • Weights used to compute a weighted average of imports from upstream sectors

18. Exposure to imports through supply chain

19. Empirical Approach • Control Variables: • Firm specific factors: 1. Import firm 2. Export firm 3. Exit firm (in subsequent period) 4. Switch firm (in subsequent period) 5. Capital-labor ratio 6. Size of firm 7. Foreign-owned firm 8. State-owned firm • Sector specific factors: 1. Average capital-labor ratio 2. Average size of firms in sector 3. Proportion of revenue generated by foreign owned firms 4. Proportion of revenue generated by state owned firms 5. Concentration Ratio Also estimate models using balanced panel as additional control for reallocation effects

20. Results – competition and productivity effects

21. Detecting productivity gains to import firms

22. Detecting productivity gains to import firms

23. Detecting productivity gains to import firms

24. Detecting competition and reallocation effects among non-import firms

25. Detecting competition and reallocation effects among non-import firms

26. Results – reallocation effects

27. Results – reallocation effects

28. Technology Channel • Further investigation of productivity spillovers for import firms post-WTO accession • Indicator for whether firm has any international suppliers • Indicator for whether relationship with international supplier resulted in technology transfers • Perform same analysis using 2 years of data and including these indicator variables

29. Results – technology spillovers

30. Results – technology spillovers

31. Summary of key findings • We find little evidence of pure productivity improvements associated with importing intermediates in the post-WTO period. • We find some suggestive evidence of positive productivity impacts in the pre-WTO period that are likely attributed to higher quality imported inputs, more imported varieties or technology transfers. • Consistent with this finding is evidence of reallocation effects in the pre-WTO period with the least efficient non-import firms exiting or beginning to import intermediates. • Once trade is fully liberalized this source of productivity growth for importing firms disappears along with reallocation effects through this channel. • This is suggestive of lower quality imports or the dumping of inferior intermediates in the post-WTO period leading to fewer opportunities for technology transfers. • Our supplementary analysis using the technology module supports this finding.

32. Thank you Questions and comments most welcome

33. APPENDIX

34. Sectoral composition in Vietnam

35. Sectoral composition in Vietnam

36. Sectoral exposure to trade: Direct

37. Trade in Vietnam – Sectoral Composition Source: Author’s calculations based on COMTRADE database. Notes: Deflated to 2000 values using 4-digit sector level GDP deflator

38. Sectoral exposure to trade: Indirect Manufacturing Services Agriculture

39. Sectoral composition in Vietnam

40. Sectoral composition in Vietnam

41. Sectoral composition in Vietnam

42. Sectoral exposure to trade: Direct