Productivity and Firm Selection: Intra-National vs Inter-National Trade∗

With heterogenous firms, inter-national trade is predicted to increase aggregate productivity through a selection effect. The same theoretical insight applies to intra-national trade between sub-national economies. In this paper, we attempt at quantifying the impact of firm selection attributable to both international and intra-national trade. To do so, we structurally estimate and simulate a multi-economy multi-sector model with monopolistic competition and variable mark-ups using firm-level data and aggregate trade figures. We focus on European economies, breaking up France into 21 (NUTS2) regional economies, and including them in a panel comprised of 10 other EU countries. We find that intra-EU trade has a sizeable impact on aggregate productivity, but that intra-national (French) trade has an even greater impact. While in 2000 the introduction of prohibitive trade costs within the EU (‘non-Europe’) would have caused an average productivity loss of roughly 8 per cent to French regions, similar intra-France trade costs (‘non-France’) would have reduced average productivity by an additional 23 per cent. We also find that productivity losses and gains vary considerably across economies and sectors, depending on market accessibility and trade costs. Finally, we provide an estimation of productivity gains accruing from further behind-the-border integration in the EU.