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Regional Integration and Productivity: The Experiences of Brazil and Mexico

This study examines the impact of regional integration on productivity in Brazil and Mexico, focusing on trade and foreign direct investment. The results show that outward-oriented industries and firms exhibit faster productivity growth, and reallocation of resources is a major driver of productivity growth.

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Regional Integration and Productivity: The Experiences of Brazil and Mexico

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  1. Regional Integration and Productivity: The Experiences of Brazil and Mexico Ernesto López-Córdova and Mauricio Mesquita Moreira Inter-American Development Bank August 2003

  2. Motivation • What integration does to productivity is a key concern in a region where sustainable growth has been an elusive goal. • The literature on trade and productivity does not cover recent agreements nor the implication of different integration strategies. • The experiences of Mexico and Brazil might provide important clues about the productivity effects of the FTAA.

  3. Overview • Literature review of the links between integration (trade and FDI) and productivity (TFP). • Main facts of Brazil and Mexico’s integration strategies. • Econometric analysis of the impact of integration on productivity based on plant level, manufacturing data. • Mexico post-NAFTA (1993-2000) and Brazil post-stabilization (1996-2000).

  4. What is the Theory? • Main Integration-Productivity Channels: • Trade • Foreign Direct Investment

  5. The Trade Effects: • Macro • comparative advantage • scale • knowledge • Micro • input availability • knowledge spillovers • import discipline • higher turnover

  6. The FDI effects: • entry • competition • knowledge spillovers • linkages

  7. What is specific about regional integration? • The trade channel might operate differently. • Comparative advantage: risk of trade diversion, particularly in south-south type of agreements. • Scale: potential gains are higher in a non-preferential liberalization but so are the potential losses. • Knowledge effects: might reduce the risk of the dislocation of learning/innovation intensive sectors, but might restrict producers access to the best practice.

  8. What is the evidence in Latin America ? • Macro level: disappointing… • IDB (2001): TFP  0.6 % a year in 1990s • Baier et al. (2002): TFP  2.9 % in 1990s. …but there is some hope coming from sector and firm level data

  9. Manufacturing labor productivity (1990=100)

  10. Firm level data • TFP Growth: • Tybout and Westbrook(1995): Mexico (1986-90) = 1.8% • Pavnick (2000): Chile (1979-86) = 2.8% • Muendler (2002): Brazil (1986-98) = 0.4% • Aw, Chen and Roberts (2001): Taiwan (1981-91) = 3.2% • Causality • Trade: Strong Evidence of the import discipline effect. • FDI: Some evidence of the prevalence of vertical over horizontal spillovers (Aitken and Harrison 1999, Kugler 2000)

  11. Brazil and Mexico: stylized facts

  12. Brazil and Mexico: stylized facts

  13. Estimating Productivity: Strategy • Measure TFP using firm- or plant-level data • Allow for firm heterogeneity • Compare performance by plant category (foreign ownership, exporters, etc.) • Control for unobserved firm characteristics. • ...but, intensive data requirements • Present aggregate measures of TFP performance. • Explore determinants of firm-level TFP performance. • Tariffs, FDI, exporting activities, input availability

  14. TFP Estimation: Data • Brazil: Panel of 10,900 firms, 1996-2000 • Mexico: Panel of 5,700 plants, 1993-2000 • Data: • Inputs, K-stock, investment, shipments, some plant characteristics • Industry-level data on tariffs, trade, FDI • Industry-wide price deflators • Foreign ownership • Trade and tariff data at detailed HS level • Aggregate weighing by imports or US exports to ROW

  15. TFP Estimation: Methodology • Cobb-Douglas production function: yit = o + llit + ssit + mmit + kkit + lnTFPit + it • OLS estimation yields biased estimates • Sample selection due to attrition • Simultaneity in TFP and input choice • Solution: Olley-Pakes (Ec. 1996) • Firms observe TFP shock, decide to stay or exit. • If firm stays, then it chooses investment (thus capital) based on observed productivity shock.

  16. Brazil: Annual TFP Growth 1996-2000

  17. Mexico: Annual TFP Growth 1993-2000

  18. Aggregate TFP Results • TFP growth might vary to the extent that regional integration differs across industries. • However, other factors might be behind TFP growth (e.g., high tech vs. low tech industries) • Nonetheless, outward oriented industries firms exhibit faster TFP growth in both countries. • Import-competing or exporting vs. non-traded industries • In Mexico, foreign-owned plants

  19. Brazil: Annual TFP Growth By Industry/Plant Characteristics, 1996-2000

  20. Mexico: Annual TFP Growth By Industry/Plant Characteristics, 1993-2000

  21. Productivity Decomposition • Within-plant TFP growth or resource reallocation toward more efficient producers? • TFP decomposition: • Within-plant TFP gains • Within-industry reallocation • Reallocation across industries • Results • Reallocation is a major force behind productivity growth • Intra-firm gains in outward-oriented industries/firms

  22. Brazil: Productivity Decomposition

  23. Mexico: Productivity Decomposition

  24. Integration and TFP: Econometric Strategy • Estimation equation: TFPijt = tTRADEijt + fFDIijt + controls + ijt • Trade variables: • Import competition: World tariffs, imports/output • Market access: • Preferential treatment in US over ROW (Mexico) • Exporting activities: Exporter dummy, exports/sales • Increased availability of imported inputs: Inputs/Costs • FDI: • Foreign K in plant’s own industry (horizontal spillovers); and • In industries that buy/sell inputs to plant’s industry (vertical spillovers)

  25. Integration and TFP: Econometric Strategy • Controls: • Age, age squared, size, industry output, capacity utilization, industrial and geographic concentration, U.S. consumption, ln(XR*US PPI), and year dummies. • Unobserved plant characteristics  Fixed effect. • Endogenous trade variables  2SLS, IVs. • For Mexican and US tariffs: NAFTA negotiated tariffs • For import penetration: Fitted import values from a gravity equation

  26. Productivity and Integration: Summary of Results

  27. Conclusions • Sizeable productivity gains from integration in both Brazil and Mexico (mainly from trade and from import discipline). • Signs that North-South integration was a more powerful boost to trade and productivity than its South-South counterpart. • How much of these gains were level or growth effect is difficult to tell.

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