Understanding the Importance of Firm Heterogeneity in a Liberalised Trade Environment: A Case Study of South African Footwear Manufacturers

Traditional trade theories, such as the Ricardian and Heckscher-Ohlin models, posit that comparative advantage determines a country’s industrial structure in a liberalized trade environment. However, developments in contemporary trade theory challenge the central tenants of this approach. Ricardian and Heckscher-Ohlin models assume that industries are comprised of homogeneous firms that can be modeled using a representative firm. Under this conception, industrial evolution is driven by comparative advantages. However, empirical evidence of post-liberalisation industrial change indicates that industrial performance is significantly more variable than predicted by traditional models. Even within industries, firms exhibit markedly divergent performance. The new trade theory of heterogeneous firms thus argues that there are fundamental differences between firms, even within narrowly defined industries, and these differences drive a post-liberalisation churning process that results in the reallocation of capital and labour within an industry. This study takes an innovative approach. Instead of comparing productivity across a large sample of firms in different industries, it uses a case study to examine, in depth, th