Trade, Import Competition and Productivity Growth In the Food Industry

Melitz and Ottaviano’s (2008) firm heterogeneity model predicts that trade liberalization induces a selection process from low to high productivity firms, that translates into an industry productivity growth. A similar firms’ selection effect is induced by market size. These predictions are tested across 25 European countries and 9 food industries, over the 1995–2008 period. Using different dynamic panel estimators we find a strong support for the model predictions, namely that import penetration is systematically positively related to productivity growth. The results are robust to measurement issues in productivity after controlling for market size, country and sector heterogeneities, and for the endogeneity of import competition. Interestingly, this positive relationship is almost exclusively driven by competition in final products coming from developed (especially EU-15) countries, suggesting that EU food imports constitute closer substitutes for domestic production than non-EU imports. These results have some potentially interesting policy implications