Multi Product Firms, Import Competition, and the Evolution of Firm-product Technical Efficiencies

We study how increased import competition affects the evolution of firm-product technical efficiencies in the small open economy of Belgium. We observe quarterly firm-product data at the 8-digit level on quantities sold and firm-level labor, capital, and intermediate inputs from 1997 to 2007, a period marked by stark declines in tariffs applied to Chinese goods. We use theory and empirical techniques developed in Dhyne et al. (2017) for multi-product production estimation to estimate firm-product quarterly technical efficiencies. This theory avoids requiring multi-product production to be a collection of single-product (SP) production functions, and it does not require an allocation rule of aggregated inputs for these single product production functions. We find that a 0.01 increase in the import share leads to a 1.05% gain in technical efficiency. This elasticity translates into gains from com-petition over the sample period exceeding 1.2 billion euros, which is over 2.5% of the average annual value of manufacturing output in Belgium. Firms appear to be less technically efficient at producing goods the further they get from their ”core” good and firms respond to competition by focusing more on their core products. Instrumenting import share – while not important for the signs of the coefficients – is very important for the magnitudes as the effect of competition increases tenfold when one moves from OLS to IV.

Please sign up for meetings here: