Trade and Technology: New Evidence on the Productivity Sorting of Firms

Several studies document an important relationship between firms' productivity and their internationalisation strategy. Recent evidence suggests that trade liberalization might imply firm growth increasing firms' probability to invest in new technologies which in turn might result in higher productivity.

In this study, we extend the analysis of the link between firms' international activity and their productivity by the aspect of technology choice. We consider domestic and exporting firms and measure technology choice by firms' actual use of advanced information technology (IT). The analysis is based on a unique German firm-level data set comprising firms from the manufacturing industry and from the service sector.

Our results show that for manufacturing firms the observed sorting pattern is consistent with recent trade theories of heterogeneous firms and technology choice: Only the relatively more productive among exporting firms are also highly technology intensive. Domestic firms, by contrast, are almost exclusively characterized by a low IT intensity. For services firms, results are similar, yet with one qualification to make. Again, exporting firms are more productive and within the group of exporters the most productive firms are high-tech firms. Yet, there are also some purely domestic firms with a high IT intensity as well. This result might be explained by the specific characteristics of services: due to their intangibility and due to the fact that many services require interactivity between firm and client, the fixed cost of foreign market entry are higher than for manufacturing firms. It is also due to these characteristics that services firms' business processes are generally more IT intensive than those of manufacturing firms. Apparently, services firms reach the size required to profit from IT investment before reaching the size required to profit from internationalisation. Thus, recent theories of heterogeneous firms and trade-induced technology adoption seem to somewhat better fit manufacturing industries.

Bertschek, Irene, Jan Hogrefe and Fabienne Rasel (2013), Trade and Technology: New Evidence on the Productivity Sorting of Firms, ZEW Discussion Paper No. 13-042, Mannheim.