Trinity College Dublin Nordic Conference on Development Economics

Trinity College Dublin Nordic Conference on Development Economics Bergen, June 2013 Trade liberalization, supply chains and productivity Carol Newman, Trinity College Dublin John Rand, University of Copenhagen Finn Tarp, UNU-WIDER and University of Copenhagen

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

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

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.

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

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

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.

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.

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)

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

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:

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:

Vietnamese Context The opening up of the Vietnamese economy began in 1986 with the adoption of a range of policy measures under doi moi (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 2000 s: Steady growth in both is evident throughout the 2000 s but in particular post WTO accession in 2007

Trade in Vietnam 100, 0 90, 0 80, 0 70, 0 60, 0 50, 0 40, 0 30, 0 20, 0 10, 0 2002 2003 2004 2005 Exports/GDP 2006 2007 2008 2009 Imports/GDP Source: General Statistics Office Vietnam, National Accounts 2010

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 inputoutput linkages along the supply chain

Manufacturing firm characteristics Number of firms Size Employees Entrants (%) Exits (%) Foreign (%) State (%) Import (%) 2002 13, 663 156 24. 83 17. 35 11. 89 10. 43 12. 76 2003 15, 401 159 26. 68 15. 39 12. 35 8. 84 13. 44 2004 18, 238 151 28. 55 11. 91 12. 13 6. 97 13. 33 2005 21, 618 141 25. 68 15. 88 11. 81 5. 58 13. 38 2006 23, 803 136 23. 60 13. 93 12. 29 4. 67 13. 38 2007 28, 821 133 28. 92 14. 84 11. 85 3. 95 12. 23 2008 36, 363 113 32. 50 21. 50 10. 64 3. 13 10. 12 2009 39, 101 108 26. 99 18. 31 10. 82 2. 96 10. 67 2010 38, 217 120 16. 42 - 10. 86 2. 76 14. 57

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 j to its total input base Weights used to compute a weighted average of imports from upstream sectors

Exposure to imports through supply chain Sector 15 17 18 19 20 21 22 24 25 26 28 29 31 32 33 34 35 36 2002 28. 10 11. 24 5. 55 5. 92 36. 34 24. 60 1. 69 40. 53 30. 12 38. 74 12. 12 18. 61 7. 04 17. 03 35. 60 6. 07 19. 66 0. 58 2003 9. 98 4. 58 2. 33 4. 33 11. 10 6. 12 0. 50 14. 27 11. 22 18. 82 6. 23 7. 53 2. 65 6. 82 15. 99 15. 24 8. 62 0. 04 2004 12. 62 7. 13 3. 47 4. 15 12. 13 5. 64 0. 55 15. 42 12. 09 20. 70 9. 67 9. 59 3. 87 8. 92 19. 07 6. 99 10. 98 0. 05 2005 12. 32 7. 24 3. 60 3. 37 13. 63 9. 19 0. 62 16. 28 11. 77 20. 61 9. 88 9. 98 3. 91 8. 93 19. 77 8. 21 11. 24 0. 05 2006 10. 11 6. 28 2. 95 3. 56 12. 54 5. 24 0. 33 15. 24 11. 52 20. 23 9. 29 9. 97 3. 23 8. 11 18. 79 8. 39 11. 43 0. 04 2007 11. 96 7. 44 2. 85 3. 32 12. 95 6. 22 0. 52 14. 70 11. 45 18. 86 9. 46 9. 51 3. 56 8. 55 18. 11 11. 43 11. 33 0. 03 2008 10. 98 7. 07 2. 71 2. 84 11. 97 7. 45 0. 40 13. 29 10. 38 16. 81 7. 86 8. 42 3. 10 8. 17 16. 68 10. 11 10. 01 0. 02 2009 7. 44 4. 02 1. 47 2. 37 8. 92 4. 32 0. 38 8. 82 6. 81 10. 89 5. 44 5. 01 1. 99 5. 17 10. 44 8. 68 6. 21 0. 02 2010 5. 76 3. 24 0. 88 1. 97 7. 04 3. 73 0. 29 7. 72 6. 37 9. 38 3. 84 4. 38 1. 50 3. 60 7. 77 5. 29 5. 57 0. 01

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 Also estimate models using balanced panel as additional control for reallocation effects 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

Results – competition and productivity effects (1) (2) (3) Balanced Prop imports upstream Import Firm*Imports upstream Concentrated pre WTO: 0. 002** 0. 000 0. 004*** -0. 002 0. 005*** -0. 003* HHI*Prop imports upstream HHI*Import Firm*Imports upstream Competitive post WTO: -0. 018** 0. 003 -0. 035** 0. 025** -0. 043** 0. 035** WTO* Imports upstream WTO* Import Firm * Imports upstream Concentrated post WTO: -0. 003*** 0. 000 -0. 004*** 0. 0005 -0. 005*** 0. 000 HHI*WTO* Imports upstream HHI*WTO* Import Firm * Imports upstream Upstream concentration controls R-squared Firms n 0. 082*** -0. 043*** No 0. 537 47, 602 141, 876 0. 104*** -0. 055*** Yes 0. 526 47, 602 141, 876 0. 153*** -0. 050** Yes 0. 874 4, 832 35, 749 Competitive pre WTO:

Detecting productivity gains to import firms (1) (2) (3) Balanced Prop imports upstream Import Firm*Imports upstream Concentrated pre WTO: 0. 002** 0. 000 0. 004*** -0. 002 0. 005*** -0. 003* HHI*Prop imports upstream HHI*Import Firm*Imports upstream Competitive post WTO: -0. 018** 0. 003 -0. 035** 0. 025** -0. 043** 0. 035** WTO* Imports upstream WTO* Import Firm * Imports upstream Concentrated post WTO: -0. 003*** 0. 000 -0. 004*** 0. 0005 -0. 005*** 0. 000 HHI*WTO* Imports upstream HHI*WTO* Import Firm * Imports upstream Upstream concentration controls R-squared Firms n 0. 082*** -0. 043*** No 0. 537 47, 602 141, 876 0. 104*** -0. 055*** Yes 0. 526 47, 602 141, 876 0. 153*** -0. 050** Yes 0. 874 4, 832 35, 749 Competitive pre WTO:

Detecting productivity gains to import firms Upstream Concentration Differential: Competitive Downstream: Prop imports upstream Import Firm*Imports upstream WTO* Import Firm * Imports upstream Concentrated Downstream: HHI*Prop imports upstream HHI*Import Firm*Imports upstream HHI*WTO* Import Firm * Imports upstream R-squared Firms n (2) (3) -0. 026** -0. 012 0. 023** 0. 011 -0. 100 -0. 002 -0. 033* -0. 071 0. 035** 0. 055** -0. 129 -0. 011 0. 231 0. 803 -0. 295** -0. 156 -0. 741 0. 103 0. 315 1. 081 -0. 433** -1. 520*** -0. 809 -0. 220 0. 526 47, 602 141, 876 0. 874 4, 832 35, 749

Detecting competition and reallocation effects among non-import firms (1) (2) (3) Balanced Prop imports upstream Import Firm*Imports upstream Concentrated pre WTO: 0. 002** 0. 000 0. 004*** -0. 002 0. 005*** -0. 003* HHI*Prop imports upstream HHI*Import Firm*Imports upstream Competitive post WTO: -0. 018** 0. 003 -0. 035** 0. 025** -0. 043** 0. 035** WTO* Imports upstream WTO* Import Firm * Imports upstream Concentrated post WTO: -0. 003*** 0. 000 -0. 004*** 0. 0005 -0. 005*** 0. 000 HHI*WTO* Imports upstream HHI*WTO* Import Firm * Imports upstream Upstream concentration controls R-squared Firms n 0. 082*** -0. 043*** No 0. 537 47, 602 141, 876 0. 104*** -0. 055*** Yes 0. 526 47, 602 141, 876 0. 153*** -0. 050** Yes 0. 874 4, 832 35, 749 Competitive pre WTO:

Results – reallocation effects (1) Exit (2) Switch Sector (3) Start Importing 0. 001*** 0. 000 0. 002 -0. 001* HHI*Prop imports upstream HHI*Import Firm*Imports upstream Competitive post WTO: -0. 005 0. 003 0. 002 -0. 004* WTO* Imports upstream WTO* Import Firm * Imports upstream Concentrated post WTO: -0. 001* 0. 001 -0. 001 0. 0005 0. 007 0. 004 0. 010 0. 002 0. 075 45, 990 137, 781 0. 074 45, 990 137, 781 0. 110 45, 820 127, 686 Competitive pre WTO: Prop imports upstream Import Firm*Imports upstream Concentrated pre WTO: HHI*WTO* Imports upstream HHI*WTO* Import Firm * Imports upstream R-squared Firms n

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

Results – technology spillovers (2) (3) (4) (5) (6) 0. 040* 0. 021 -0. 005 0. 047** 0. 033 -0. 010** -0. 014 -0. 013 -0. 022* -0. 009 -0. 003 0. 033 -0. 010* Competitive: Prop imports upstream Int supplier * Imports upstream Int supplier tech transfers * Imports upstream Concentrated HHI*Prop imports upstream HHI* Int supplier*Imports upstream HHI* Int supplier tech transfers HHI*Int supplier tech transfers*Imports upstream R-squared Firms N -0. 097 -0. 171 0. 056 -0. 587* 0. 095* 0. 768 7, 830 12, 530 0. 770 7, 830 12, 530 0. 803 2, 848 4, 104 0. 807 2, 848 4, 104

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.

Thank you Questions and comments most welcome

APPENDIX

Sectoral composition in Vietnam Share of Employment Manufacturing 2002 51. 06 HT Manufacturing 14. 74 Services Agriculture 39. 27 9. 67 2003 53. 20 15. 31 38. 42 8. 37 2004 53. 83 15. 63 38. 55 7. 62 2005 53. 10 15. 49 39. 62 7. 28 2006 54. 18 15. 93 39. 05 6. 76 2007 54. 01 16. 51 39. 91 6. 08 2008 50. 05 15. 72 42. 49 7. 17 2009 48. 83 16. 20 44. 44 6. 72 2010 45. 67 15. 19 48. 35 5. 97

Sectoral composition in Vietnam Share of Output Manufacturing 2002 33. 89 HT Manufacturing 15. 07 Services Agriculture 59. 51 6. 60 2003 34. 23 16. 01 60. 00 5. 76 2004 37. 74 17. 60 55. 29 6. 96 2005 37. 10 17. 50 55. 55 7. 35 2006 37. 75 17. 82 55. 72 6. 52 2007 38. 73 19. 03 56. 82 4. 45 2008 36. 08 18. 05 60. 68 3. 24 2009 40. 14 20. 33 56. 75 3. 10 2010 37. 29 19. 47 59. 90 2. 81

Sectoral exposure to trade: Direct Share of Exports Share of Imports Man Man HT Ag 2002 73. 45 18. 29 26. 55 93. 85 70. 29 6. 15 2003 49. 87 17. 43 50. 12 89. 70 71. 34 10. 29 2004 34. 99 13. 83 65. 01 83. 90 69. 71 16. 08 2005 46. 97 17. 27 53. 03 84. 19 63. 05 15. 78 2006 35. 58 12. 53 64. 42 86. 11 70. 96 13. 78 2007 31. 38 12. 87 68. 62 82. 92 70. 38 16. 90 2008 36. 18 13. 15 63. 81 77. 55 63. 18 22. 27 2009 32. 36 13. 98 67. 62 71. 39 58. 33 28. 31 2010 33. 23 14. 85 66. 69 70. 12 58. 26 29. 55

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

Sectoral exposure to trade: Indirect Manufacturing Services Agriculture

Sectoral composition in Vietnam Share of Employment Manufacturing 2001 49. 69 HT Manufacturing 14. 62 Services Agriculture 39. 41 10. 89 2002 51. 06 14. 74 39. 27 9. 67 2003 53. 20 15. 31 38. 42 8. 37 2004 53. 83 15. 63 38. 55 7. 62 2005 53. 10 15. 49 39. 62 7. 28 2006 54. 18 15. 93 39. 05 6. 76 2007 54. 01 16. 51 39. 91 6. 08 2008 50. 05 15. 72 42. 49 7. 17 2009 48. 83 16. 20 44. 44 6. 72 2010 45. 67 15. 19 48. 35 5. 97

Sectoral composition in Vietnam Share of Capital Manufacturing 2001 33. 06 HT Manufacturing 16. 81 Services Agriculture 56. 54 10. 39 2002 37. 87 18. 89 51. 46 10. 66 2003 37. 83 19. 38 52. 92 9. 24 2004 36. 54 18. 59 54. 56 8. 90 2005 35. 64 18. 63 56. 57 7. 79 2006 33. 72 18. 29 59. 63 6. 65 2007 30. 00 16. 15 65. 47 4. 52 2008 30. 48 16. 39 66. 07 3. 45 2009 29. 26 17. 60 67. 10 3. 64 2010 20. 97 12. 31 75. 41 3. 62

Sectoral composition in Vietnam Share of Output Manufacturing 2001 34. 77 HT Manufacturing 16. 35 Services Agriculture 57. 04 8. 18 2002 33. 89 15. 07 59. 51 6. 60 2003 34. 23 16. 01 60. 00 5. 76 2004 37. 74 17. 60 55. 29 6. 96 2005 37. 10 17. 50 55. 55 7. 35 2006 37. 75 17. 82 55. 72 6. 52 2007 38. 73 19. 03 56. 82 4. 45 2008 36. 08 18. 05 60. 68 3. 24 2009 40. 14 20. 33 56. 75 3. 10 2010 37. 29 19. 47 59. 90 2. 81

Sectoral exposure to trade: Direct Share of Exports Share of Imports Man Man HT Ag 2001 42. 21 15. 21 57. 79 84. 50 65. 86 15. 49 2002 73. 45 18. 29 26. 55 93. 85 70. 29 6. 15 2003 49. 87 17. 43 50. 12 89. 70 71. 34 10. 29 2004 34. 99 13. 83 65. 01 83. 90 69. 71 16. 08 2005 46. 97 17. 27 53. 03 84. 19 63. 05 15. 78 2006 35. 58 12. 53 64. 42 86. 11 70. 96 13. 78 2007 31. 38 12. 87 68. 62 82. 92 70. 38 16. 90 2008 36. 18 13. 15 63. 81 77. 55 63. 18 22. 27 2009 32. 36 13. 98 67. 62 71. 39 58. 33 28. 31 2010 33. 23 14. 85 66. 69 70. 12 58. 26 29. 55