Productivity Growth, Innovation, and Upgrading along Global Value Chains

Greater exposure to international trade improves productivity by increasing competition, expanding product markets, and improving access to production inputs. Productivity increases at the industry level because competitive pressure leads to a reallocation of resources to more productive firms, while the least productive ones are forced to exit the market (Melitz 2003; Melitz and Ottaviano 2008; Eslava et al. 2013). The productivity of firms can also increase because heightened competition from imported products pushes them to invest in new processes, technologies, and skills to survive (Shu and Steinwender 2019). The possibility to expand into larger export markets also incentivizes firms to improve the production efficiency and the quality of their products (Bustos 2011). And access to a larger range of intermediate production inputs potentially lowers the input costs of firms, improves product quality, and expands product variety (Fieler, Eslava, and Xu 2018; Goldberg et al. 2010; Amiti and Konings 2007). Indeed, a positive and significant causal effect of trade—measured as the sum of exports plus imports to a country’s gross domestic product—on aggregate productivity has long been established in the economic literature (Alcalá and Ciccone 2004; Alesina, Spolaore, and Wacziarg 2000; Frankel and Romer 1999).