Simposio de Análisis Económico - Diciembre 2008 Mark-ups, offshoring and intra-firm trade Lourdes Moreno Martín Diego Rodríguez Rodríguez GRIPICO - Universidad Complutense de Madrid Simposio de Análisis Económico - Diciembre 2008

Outline Objective Empirical approach Data Econometric results Background Objective Empirical approach Data Econometric results Main conclusions

Background Many papers have analyzed the link productivity-market openness in the context of firm heterogeneity. Less attention is devoted to other performance measures: mark-ups Some explanations: There are more empirical problems to estimate mark-ups at the micro-level Most of theoretical approaches uses to assume constant markups Melitz (2003), Bernard et al (2003), Bernard et al (2007), Yeaple (2005), Emami-Namini and López (2008). Melitz and Ottaviano (2008) propose an alternative framework with non-constant markups. In Moreno and Rodriguez (2008) we test the predictions using a structural specification to identify markups (export).

Objective 1/3 To test the Import as Market Discipline Hypothesis (IMD) Distinguishing between Intermediate (Offshoring) and Final Goods Import. Are pro-competitive effects of openness (import penetration) more relevant in final goods? YES Considering the intra-firm trade. Product standardization (output) and market concentration, as determining factor of the pro-competitive effects of import penetration.

Objective (previous papers) 2/3 IO & NIO in the eighties: The IMD is confirmed Accounting approach & Hall approach No distinction between Final & Intermediate goods Tybout (2003) Egger & Egger (2004): It takes into account current characteristics of international trade (offshoring), but with a classical IO inter-industry perspective. Melitz & Ottaviano (2008): Openness implies more productive firms Two effects on margins: Efficiency (+) and pro-competitive (-) Antras and Helpman (2004) model combines organizational and location decisions to predict a positive association between productivity and international outsourcing.

Objective 3/3 Characteristics of the paper: a (simple) approach to estimate markpus (Roeger, 1995) that avoids an accounting measure. an unbalanced panel of Spanish manufacturing firms (1990-2005). This is a long period with a relevant opening to trade. firm-level imports and industrial averages as indicators of import penetration. we distinguish between final and intermediate goods. we do not have information about the number of traders and about offshoring of services. and we provide two complementary econometric results: pooled-panel estimations and firm-specific regression.

Productivity term өit disappear in the “net” SR Empirical approach 1/3 How to estimate μ (P/C´) or Lerner Index? Procedure suggested by Roeger (1995). It is based on the differences between the primal and dual (or price-based) Solow residual. Productivity term өit disappear in the “net” SR

Empirical approach 2/3 Empirical problems: Factors of production should be adjusted instantaneously (in other case, the “net” SR is cyclical). We use capacity utilization as control variable. Measurement errors We use effective hours (instead of number of employees) and a more accurate measurement of capital stock based on permanent inventory methodology. CRS: this assumption is not rejected or, any case, only very slightly decreasing returns to scale are obtained (Moreno and Rodriguez, 2004).

Empirical approach 3/3 The set of regressions includes: The effect of import activity (IMP): binary variable and import ratio ratio (firm-level and industrial average). The interacted effect of final and intermediate imports (Type). The interacted effect for non-differentiated products (Other var.). The interacted effect of market share/concentration (Other var.). Additional control variables: utilization of capacity, temporal dummies. OLS and fixed-effects. 18,900 observations. Individual estimations (for subsample of firms with t>9 years).

Data 1/2 Survey on Business Strategies (1990-2005) Import and export activities are closely related. but imports: are usually more difficult to measure at the firm level (intermediaries are relevant). are more heterogeneous than exports. wholesale traders (resellers) are relevant, even though we analyze manufacturers.

Data 2/2 Type of imports: A: Sales of commercialized products not elaborated by the firm and that come from abroad. B: Percentage of imports from foreign companies with which the firm has commercialization and distribution agreements or which participate in the firm’s capital. C: (if B>0) Binary variable that indicates if imports are similar to the products elaborated by the firm. D: Percentage of foreign ownership. We combine that information to obtain different approaches to intermediate vs final imports at the firm level.

Econometric results 1/6

Econometric results 2/6 Average markups for non importers β1 ≈ 0.18 (highly robust across estimations) The effect of imports (always significant): β2 ≈ -0.014 (with import dummy, at the firm-level) β2 ≈ -0.067 to -0.092 (with firm-level imports) β2 x average MR = -0.008 β2 ≈ -0.12 to -0.14 (with industrial averages) Import ratio

Econometric results 3/6 β3 x average MR (of FG) = [-0.017, -0.021] However, the effect of import penetration differs according to the type of imports: The negative effect of import propensity is larger for importers of final-goods. β3 x average MR (of FG) = [-0.017, -0.021] For intermediate-goods the sign reverses. β3 x average MR (of IG) = [0.001, 0.021] With a firm-level measure (and using averages): markups for (average) final importers ≈ 0.16 markups for (average) intermediate importers ≈ 0.20

Econometric results 4/6 The negative effect of imports is reinforced when firms declare to produce non-differentiated goods. This effect is even larger for final goods importers. We do not find significant differences of import ratio for intra-firm traders. The pro-competitive effect of import ratio does not differ according to market share (though market share has a direct positive effect). Capacity utilization: positive and significant. Robustness: The results are confirmed with Fixed effects estimations Individual (firm) regressions (t > 9 years)

Econometric results (Individuals regressions) 5/6 Markup distribution (896 firms, t>9) (firm-specific regressions)

Econometric results (Individuals regressions) 6/6 Markups distribution across firms (estimated parameters of firm-level regression)

Conclusions 1/1 The paper: Provides an empirical analysis of a scarcely studied performance measurement (markups) with market openness (imports). It avoids accounting measures of margin. The results suggest that intermediate imports partially counteract the pro-competitive effect of final imports. The downward effect of final imports is lower in the context of differentiated products. Firm-level approach to import penetration is consistent with industry averages. Next step: a joint approach to both sides of international activity.