Firms and Product Choice in International Trade

National Bureau Of Economic Research Inc, Cambridge MA

Investigators

Abstract

Recent empirical and theoretical work has established the importance of within-industry firm heterogeneity in international trade. This research has emphasized productivity differences across firms to explain why exporters are larger more productive and less likely to fail than non-exporting firms. Although this emerging literature goes a long way towards integrating the firm into international trade, it consistently ignores the ability of firms to switch or upgrade their product lines in response to changes in the competitive environment. This project has two objectives. The first is to extend the theoretical literature on firm-driven international trade to allow for endogenous product selection. The second is to construct two new firm-level panel datasets to test the importance of product switching in response to changes in domestic and international competition. The basic model extends the existing framework with heterogeneous firms, imperfect competition and trade costs to include endogenous product selection by individual firms. In response to changes in domestic or foreign market conditions, firms make decisions about whether to continue operations, enter foreign markets, and which product to produce. The model yields specific predictions about the path of industry productivity as well as firm exit, entry, growth and (product) switching up or down. The empirical work focuses on extending existing plant-level datasets on US manufacturing firms to incorporate detailed information on which products are manufactured. First, (often-overlooked) product-specific measures of plant output are employed from the existing plant-level dataset in the US Census Bureau's Longitudinal Research Database (LRD). The use of these data provide a detailed picture of the breadth of products produced by US manufacturing firms, generating a new set of facts about how firm product mix varies in response to changes in domestic and foreign markets. The second major data component of the project is the development of a dataset linking US transaction-level trade data to the LRD. These data are derived from the customs forms filled out by importers and exporters and include data on all individual trade transactions by US-based firms from 1992-2001. Construction of this linked dataset allows researchers to track the destination and unit value of product-level plant exports as well as the source, value and quantity of imported inputs.