Firm heterogeneity in international trade

International trade affects us all. It expands markets for firms to thrive and increases varieties to satisfy consumers. From waking up with a coffee grown on Brazilian trees to closing a light manufactured in China at night, our daily routines are riddled with products that can be provided by firms located across the world. Not every firm chooses to do so though. Firms are different, heterogeneous, and only those that are sufficiently productive successfully engage in trade. The ability of current trade models to capture this kind of detailed firm-level trade reality brings them much closer to businesses and policymakers. This thesis aims to progress the field of international trade on the definition, characterization and measurement of the building block of these trade models: firm-level heterogeneity. The first and second chapter of the thesis focus on the characterization of firm-level heterogeneity in international trade models. In the first chapter, we reduce the (modeled) information necessary when characterizing firm-level heterogeneity to two sufficient statistics of the sales distribution. Combined with the nature of firm-level sales, this observation allows us to provide evidence that individual firms carry the potential to influence the aggregate economy. Moreover, we find that none of the currently considered characterizations provide a significantly good fit to the data. In the second chapter, we therefore introduce a new distribution type into the trade literature: Finite Mixture Models (FMM). FMMs allow for the heterogeneity distribution of different groups of firms to determine the overall firm-level heterogeneity distribution. They are motivated by the observation that heterogeneity evolves differently between groups of firms, a feature established distributions do not allow for. We demonstrate the excellent performance of FMMs on the population of active Portuguese firms. The third chapter discusses possible shortcomings of the predominant measurement of firm-level heterogeneity. Current methodologies rely on sales to determine heterogeneity among firms, which does not allow to differentiate between different types of this heterogeneity. Whether a firm its competitive (dis)advantage is transitory (for instance due to a fire) or rather persistent (for instance due to its geographical location), however, will likely affect the activities of this business. In this chapter, we develop a theoretical model that distinguishes between transitory and persistent firm-level heterogeneity. The model is evaluated using French firm-level data over the period 1998-2006. We show that conflating transitory and persistent heterogeneity results in an over-dispersed characterization of heterogeneity in trade models followed by an overestimation of the welfare effects associated to trade.The fourth chapter proposes a novel measurement approach to evaluate the commonly used Hicks-neutral definition of firm-level heterogeneous productivity. Specifically, we test whether the evolution of productivity affects all inputs of the production function equally, termed Hicks-neutral technological change, or whether technological change is factor biased, affecting some factor inputs more than others. We analyze multiple Belgian manufacturing industries and reject the predominant definition of Hicks-neutral technological change over the period 1996-2015. Moreover, we find significant heterogeneity in the pattern of technological change between and within industries.Public defense: 2020-01-30International trade affects us all. It expands markets for firms to thrive and increases varieties to satisfy consumers. From waking up with a coffee grown on Brazilian trees to closing a light manufactured in China at night, our daily routines are riddled with products that can be provided by firms located across the world. Not every firm chooses to do so though. Firms are different, heterogeneous, and only those that are sufficiently productive successfully engage in trade. The ability of current trade models to capture this kind of detailed firm-level trade reality brings them much closer to businesses and policymakers. This thesis aims to progress the field of international trade on the definition, characterization and measurement of the building block of these trade models: firm-level heterogeneity. The first and second chapter of the thesis focus on the characterization of firm-level heterogeneity in international trade models. In the first chapter, we reduce the (modeled) information necessary when characterizing firm-level heterogeneity to two sufficient statistics of the sales distribution. Combined with the nature of firm-level sales, this observation allows us to provide evidence that individual firms carry the potential to influence the aggregate economy. Moreover, we find that none of the currently considered characterizations provide a significantly good fit to the data. In the second chapter, we therefore introduce a new distribution type into the trade literature: Finite Mixture Models (FMM). FMMs allow for the heterogeneity distribution of different groups of firms to determine the overall firm-level heterogeneity distribution. They are motivated by the observation that heterogeneity evolves differently between groups of firms, a feature established distributions do not allow for. We demonstrate the excellent performance of FMMs on the population of active Portuguese firms. The third chapter discusses possible shortcomings of the predominant measurement of firm-level heterogeneity. Current methodologies rely on sales to determine heterogeneity among firms, which does not allow to differentiate between different types of this heterogeneity. Whether a firm its competitive (dis)advantage is transitory (for instance due to a fire) or rather persistent (for instance due to its geographical location), however, will likely affect the activities of this business. In this chapter, we develop a theoretical model that distinguishes between transitory and persistent firm-level heterogeneity. The model is evaluated using French firm-level data over the period 1998-2006. We show that conflating transitory and persistent heterogeneity results in an over-dispersed characterization of heterogeneity in trade models followed by an overestimation of the welfare effects associated to trade.The fourth chapter proposes a novel measurement approach to evaluate the commonly used Hicks-neutral definition of firm-level heterogeneous productivity. Specifically, we test whether the evolution of productivity affects all inputs of the production function equally, termed Hicks-neutral technological change, or whether technological change is factor biased, affecting some factor inputs more than others. We analyze multiple Belgian manufacturing industries and reject the predominant definition of Hicks-neutral technological change over the period 1996-2015. Moreover, we find significant heterogeneity in the pattern of technological change between and within industries.D