Trade, Technology, and Productivity: A Study of Brazilian Manufacturers, 1986-1998

Brazil’s trade liberalization between 1990 and 1993, and its partial reversal in 1995, are used to study how trade affects productivity. The production function of Brazilian manufacturers is estimated at the SIC two-digit level under an extension of Olley and Pakes’ (1996) three-step procedure. Firm-level productivity is inferred and then related to trade in a causal analysis. Findings suggest that (1) the use of foreign inputs plays a negligible role for productivity change, whereas (2) foreign competition pressures firms to raise productivity markedly. (3) The shutdown probability of inefficient firms rises with competition from abroad, thus contributing positively to aggregate productivity. Counterfactual simulations indicate that (2) and (3) are major sources of productivity change. JEL F14, F43 Does an open economy grow faster than a closed economy, and, if so, why? Over the past two decades, many developing countries and transition economies have liberalized international trade. In the early nineties, Brazil reduced tariffs ∗[email protected] (socrates.berkeley.edu/ ̃muendler/). I am indebted to my advisors Maury Obstfeld, David Romer, Dan McFadden and Pranab Bardhan for their guidance throughout the project. Ann Harrison, Aviv Nevo, George Akerlof, Mauŕıcio Mesquita, Paul Ruud and Tom Rothenberg as well as Pete Adams, Pinar Karaca, and Till von Wachter shared many suggestions, and so did seminar participants at IBGE Rio de Janeiro, PUC-Rio, IPEA Braśılia, IADB Washington DC, and UC Berkeley. Any remaining mistakes are mine. I thank the team at IBGE’s Departamento de Indústria for patiently providing access to the data. Financial support from the Social Science Research Council with an International Predissertation Fellowship (funds from the Ford Foundation), and mini-grants from IBER and CIDER at UC Berkeley are gratefully acknowledged.