Regional Integration And Productivity

Regional Integration and Productivity: Regional Integration and Productivity: The Experiences of Brazil and MexicoThe Experiences of Brazil and Mexico

Ernesto López-Córdova and Mauricio Mesquita MoreiraErnesto López-Córdova and Mauricio Mesquita Moreira

IDB - INT\ITDIDB - INT\ITD

NetAmericas Conference onNetAmericas Conference on

““Integrating the Americas”Integrating the Americas”

November 20-November 20-21, 21, 20022002

MotivationMotivation What integration does to productivity is a What integration does to productivity is a

key concern in a region where long term, key concern in a region where long term, sustainable growth has been a elusive goal;sustainable growth has been a elusive goal;

The literature on trade and productivity does The literature on trade and productivity does not cover recent agreements;not cover recent agreements;

There has been no attempt to compare There has been no attempt to compare different integration strategies;different integration strategies;

OverviewOverview Literature review of the links between Literature review of the links between

integration (trade and FDI) and productivity integration (trade and FDI) and productivity (TFP);(TFP);

Main facts of Brazil and Mexico’s integration Main facts of Brazil and Mexico’s integration strategies;strategies;

Econometric analysis of the impact of Econometric analysis of the impact of integration on productivity based on plant integration on productivity based on plant level, manufacturing data. Mexico post-level, manufacturing data. Mexico post-NAFTA (1993-99) and Brazil post-NAFTA (1993-99) and Brazil post-stabilization (1996-99); stabilization (1996-99);

What is the Theory?What is the Theory?

Main Integration-Productivity ChannelsMain Integration-Productivity Channels: :

TradeTrade

Foreign Direct InvestmentForeign Direct Investment

The Trade Effects:The Trade Effects:

macromacro comparative advantagecomparative advantage

scalescale

knowledgeknowledge micromicro input availabilityinput availability

knowledge spilloversknowledge spillovers

import disciplineimport discipline

higher turnoverhigher turnover

The FDI effects:The FDI effects:

entryentry

competitioncompetition

knowledge spilloversknowledge spillovers

linkageslinkages

What is specific about regionalWhat is specific about regional

integrationintegration??• The trade channel might operate differentlyThe trade channel might operate differently ..

Comparative advantageComparative advantage: risk of trade diversion, : risk of trade diversion, particularly in south-south type of agreements.particularly in south-south type of agreements.

ScaleScale: potential gains are higher in a non-preferential : potential gains are higher in a non-preferential liberalization but so are the potential losses.liberalization but so are the potential losses.

Knowledge effectsKnowledge effects: might reduce the risk of the : might reduce the risk of the dislocation of learning/innovation intensive sectors, but dislocation of learning/innovation intensive sectors, but might restrict producers access to the best practice.might restrict producers access to the best practice.

What is the evidence in the What is the evidence in the region ?region ?

• Macro level: disappointing….Macro level: disappointing…. IDB (2001)IDB (2001) - - TFP TFP 0.6 % a year in the 1990s0.6 % a year in the 1990s Baier et al. (2002)Baier et al. (2002) - TFP TFP 2.9 % same period.2.9 % same period.

• …….but some evidence of knowledge effects..but some evidence of knowledge effects. Blyde (2002)Blyde (2002) - - positive technological spillovers through positive technological spillovers through

imported machineryimported machinery Schiff et al. (2002)Schiff et al. (2002) - Higher North-South technological Higher North-South technological

spilloversspillovers..

Labor productivity, Manufacturing SectorLabor productivity, Manufacturing Sector1990=1001990=100

80

130

180

230

280

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Argentina Brazil ChileColombia USA KoreaMexico

Source: Countries' Statistical Offices

Firm level dataFirm level data

• GrowthGrowth– Tybout and Westbrook(1995):Tybout and Westbrook(1995): Mexico (1986-90) Mexico (1986-90) TFP 1.8 %TFP 1.8 %

– Pavnick (2000):Pavnick (2000): Chile (1979-86)Chile (1979-86). TFP 2.8 %. TFP 2.8 %

– Muendler (2002):Muendler (2002): Brazil (1986-98). Brazil (1986-98). TFP 0.4 %TFP 0.4 %– Aw, Chen and Roberts (2001):Aw, Chen and Roberts (2001): Taiwan (1981-1991) TFP 3.2 Taiwan (1981-1991) TFP 3.2

%%

• CausalityCausality– TRADETRADE. Strong Evidence of the . Strong Evidence of the import discipline effect.import discipline effect.

– FDI . FDI . SomeSome evidence of the prevalence of evidence of the prevalence of vertical over vertical over horizontal spillovershorizontal spillovers (Aitken and Harisson 1999, Kugler 2000, ) (Aitken and Harisson 1999, Kugler 2000, )

Brazil and Mexico: stylized factsBrazil and Mexico: stylized facts

TFP Growth: National Accounts Data

1.9

0.9 0.8

0.1

-2.28

1.731.9

0.4

-1.5

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

1940s 1950s 1960s 1970s 1980s 1990s

Brazil Mexico

Soruce: Bacha and Bonelli (2001) and World Bank (1988)

Brazil and Mexico: stylized factsBrazil and Mexico: stylized factsAverage Manufacturing Tariff

Mexico, 1993-2000

0

4

8

12

16

1993 1994 1995 1996 1997 1998 1999 2000

Av

era

ge

ma

nu

fac

turi

ng

ta

riff

(%

)

North America World Rest of the World

Source : López-Córdova (2002)

Average MFN and Mercosur TariffBrazil, 1987-2000

0

10

20

30

40

50

60

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Ave

rag

e ta

riff

(%

)

MFN MNF Manufacturing Mercosur

Source : For MFN Kume et al. (2000) and Receita Federal. For Mercosur, Estevadeordal et al. (2000) and Receita Federal.



0

5

10

15

20

25

30

35

40

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Imp

ort

pen

etra

tio

n a

nd

exp

ort

s ra

tio

s (%

)

Imports Brazil Imports Mexico Exports Brazil Exports Mexico

Note: Import penetration divided by domestic consumption. Export ratio is exports divided by output. Data for Mexico does not includes maquilas.Source : Own calculations based on IBGE and INEGI Manufacturing Surveys.

Import Penetration and Export Ratios in Manufacturing: Brazil and Mexico, 1988-2000

Estimating Productivity: StrategyEstimating 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

TFP Estimation: DataTFP Estimation: Data• Brazil: Panel of 10,900 firms, 1996-99Brazil: Panel of 10,900 firms, 1996-99• Mexico: Panel of 5,300 plants, 1993-99Mexico: Panel of 5,300 plants, 1993-99• Data: Data:

– Inputs, K-stock, investment, shipments, some plant Inputs, K-stock, investment, shipments, some plant characteristicscharacteristics

– Industry-level data on tariffs, trade, FDIIndustry-level data on tariffs, trade, FDI

– Industry-wide price deflatorsIndustry-wide price deflators

– Foreign ownershipForeign ownership

• Trade and tariff data at detailed HS levelTrade and tariff data at detailed HS level– Aggregate weighing by imports or US exports to ROWAggregate weighing by imports or US exports to ROW

TFP Estimation: MethodologyTFP Estimation: Methodology

• Cobb-Douglas production function: Cobb-Douglas production function: yit = o + llit + ssit + mmit + kkit + lnTFPit + it

• OLS estimation yields biased estimatesOLS estimation yields biased estimates– Sample selection due to attritionSample selection due to attrition

– Simultaneity in TFP and input choiceSimultaneity in TFP and input choice

• Solution: Olley-Pakes (Ec. 1996)Solution: Olley-Pakes (Ec. 1996)– Firms observe TFP shock, decide to stay or exit.Firms observe TFP shock, decide to stay or exit.

– If firm stays, then it chooses investment (thus capital) If firm stays, then it chooses investment (thus capital) based on observed productivity shock. based on observed productivity shock.

Brazil: Annual TFP Growth 1996-99Brazil: Annual TFP Growth 1996-99

2.2

14.0

0.9

12.4

1.9

0.5

4.9

-0.8

0.4

-0.1

2.3

-2.2

2.4

8.3

0.0

4.3

8.2

-0.9

-2.4

6.5

5.1

2.4

-3.5 -0.5 2.5 5.5 8.5 11.5 14.5

Furniture; other manufacturing

Other transportation equipment

Motor vehicles

Precision instruments

Radio, television and communication equipment

Electrical machinery

Office, accounting and computing machinery

Machinery and equipment

Fabricated metal products

Basic metals

Other non-metallic mineral products

Rubber and plastics products

Chemicals and chemical product

Refined petroleum and nuclear fuel

Publishing

Paper and paper products

Wood products

Leather

Apparel

Textiles

Food products and beverages

Total manufacturing

Annual total factor productivity growth (%)Source : López-Córdova and Moreira (2002)

Mexico: Annual TFP Growth 1993-99Mexico: Annual TFP Growth 1993-99

2.1

3.1

-0.3

3.3

4.8

0.6

5.9

4.6

2.5

-3.0

3.2

-0.3

2.4

-1.1

1.9

1.5

2.7

2.0

2.2

1.1

-0.1

1.1

-3.5 -2.5 -1.5 -0.5 0.5 1.5 2.5 3.5 4.5 5.5

Furniture; other manufacturing

Other transportation equipment

Motor vehicles

Precision instruments

Radio, television and communication equipment

Electrical machinery

Office, accounting and computing machinery

Machinery and equipment

Fabricated metal products

Basic metals

Other non-metallic mineral products

Rubber and plastics products

Chemicals and chemical product

Refined petroleum and nuclear fuel

Publishing

Paper and paper products

Wood products

Leather

Apparel

Textiles

Food products and beverages

Total manufacturing

Annual total factor productivity growth (%)

Source : Author's calculation

Aggregate TFP ResultsAggregate TFP Results

• TFP growth might vary to the extent that regional TFP growth might vary to the extent that regional integration differs across industries integration differs across industries – However, other factors might be behind TFP growth However, other factors might be behind TFP growth

(e.g., high tech vs. low tech industries)(e.g., high tech vs. low tech industries)

• Nonetheless, outward oriented industries firms Nonetheless, outward oriented industries firms exhibit faster TFP growth in both countriesexhibit faster TFP growth in both countries– Import-competing or exporting vs. non-traded Import-competing or exporting vs. non-traded

industriesindustries

– In Mexico, foreign-owned plantsIn Mexico, foreign-owned plants

Brazil: Annual TFP Growth 1996-99Brazil: Annual TFP Growth 1996-99

by Industry/Plant Characteristicsby Industry/Plant Characteristics

1.49

2.93

3.35

2.16

1.33

2.19

2.29

2.14

1.90

3.07

2.42

2.36

2.43

0 0.5 1 1.5 2 2.5 3 3.5 4

MNC

Domestic manufacturers

Non-users of imported inputs

Imported-input users

Non-exporters

Mercosur exporters

All exporters

Non-traded industry

Exporting industry in Mercosur

Exporting industry

Importing industry in Mercosur

Import-competing industry

Total manufacturing

Annual TFP Growth ( % )

Source : López-Córdova and Moreira (2002)

Mexico: Annual TFP Growth 1993-99Mexico: Annual TFP Growth 1993-99

by Industry/Plant Characteristicsby Industry/Plant Characteristics


0.8

1.4

1.6

1.3

1.0

0.6

1.4

1.4

1.7

3.2

4.4

1.1

0.0

0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5

Domestic manufacturers

MNC: Rest of the world

MNC: North America



Non-exporters

Exporters

Non-traded industry

Exporting industry in North America

Exporting industry

Importing industry in North America

Import-competing industry

Total manufacturing

Annual TFP Growth ( % )

Productivity DecompositionProductivity Decomposition

• Within-plant TFP growth or resource reallocation Within-plant TFP growth or resource reallocation toward more efficient producers?toward more efficient producers?

• TFP decomposition:TFP decomposition:– Within-plant TFP gainsWithin-plant TFP gains

– Within-industry reallocationWithin-industry reallocation

– Reallocation across industriesReallocation across industries

• ResultsResults– Reallocation is a major force behind productivity Reallocation is a major force behind productivity

growthgrowth

– Intra-firm gains in outward-oriented industries/firmsIntra-firm gains in outward-oriented industries/firms

Brazil: Productivity DecompositionBrazil: Productivity Decomposition

-50% -30% -10% 10% 30% 50% 70% 90%

Domestic

MNC



Non-exporters

Rest of the World exporters

Mercosur exporters

Non-exporters

All exporters

Non-traded in MERCOSUR

Traded in MERCOSUR

Non-traded

Traded

Manufacturing

Within plant effect Reallocation within industry Reallocation across industriesSource : López-Córdova and Moreira (2002)

Mexico: Productivity DecompositionMexico: Productivity Decomposition

-100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100%

Domestic

MNC: Rest of the World

MNC: North America



Non-exporters

Exporters

Non-traded in North America

Traded in North America

Non-traded

Traded

Manufacturing

Within plant effect Reallocation within industry Reallocation across industries


Integration and TFP: Integration and TFP: Econometric StrategyEconometric Strategy

• Estimation equation:Estimation equation:TFPijtijt = = tTRADEijtijt + + fFDIijtijt + + controls + ijt

• Trade variables: Trade variables: – Import competition (Mexico): World tariffs, imports/outputImport competition (Mexico): World tariffs, imports/output

– Market access (Mexico): Preferential treatment in US over ROWMarket access (Mexico): Preferential treatment in US over ROW

– Exporting activities: Exporter dummy, exports/salesExporting activities: Exporter dummy, exports/sales

– Increased availability of imported inputs: Inputs/CostsIncreased availability of imported inputs: Inputs/Costs

• FDIFDI– Foreign K in plant’s own industry (horizontal spillovers) and ...Foreign K in plant’s own industry (horizontal spillovers) and ...

– In industries that buy/sell inputs to plant’s industry (vertical spillovers)In industries that buy/sell inputs to plant’s industry (vertical spillovers)

Integration and TFP: Integration and TFP: Econometric StrategyEconometric Strategy

• Controls: Controls: – Age, age squared, size, industry output, capacity utilization, Age, age squared, size, industry output, capacity utilization,

industrial and geographic concentration, U.S. consumption, industrial and geographic concentration, U.S. consumption, ln(XR*US PPI), and year dummies.ln(XR*US PPI), and year dummies.

• Unobserved plant characteristics Unobserved plant characteristics Fixed effect Fixed effect • Endogenous trade variables Endogenous trade variables 2SLS, IVs 2SLS, IVs

– For Mexican and US tariffs: NAFTA negotiated tariffs For Mexican and US tariffs: NAFTA negotiated tariffs

– For import penetration: Fitted import values from a gravity For import penetration: Fitted import values from a gravity equationequation

Brazil: Econometric ResultsBrazil: Econometric Results

Independent variablesIndependent variables Reg 1Reg 1 Reg 2Reg 2 Reg 3Reg 3 Reg 4Reg 4 Reg 5Reg 5 Reg 6Reg 6 Reg 7Reg 7 Reg 8Reg 8 Reg 9Reg 9 Reg 10Reg 10Exporting activityExporting activityWorld exporter 0.0062

(0.0080)Mercosur exporter 0.0105

(0.0080)Exports/sales 0.0011

(0.0003)***Mercosur exports/sales 0.0008

(0.0009)Imported intermediate goodsImported intermediate goodsImported-input/material costs -0.0006 -0.0004

(0.0002)*** (0.0002)*Imports/material costs 0.0004 0.0003

(0.0001)*** (0.0001)***

FDI spilloversFDI spilloversIntra-industry -0.2013 -0.2031 -0.2004 0.1224 0.1221 0.1210 0.1229 0.1222 0.1212 0.1223

(0.0903)** (0.0903)** (0.0902)** (0.0920) (0.0920) (0.0920) (0.0919) (0.0920) (0.0920) (0.0919)From forward linkages -0.9624 -0.9528 -0.9732 -0.2096 -0.2094 -0.2098 -0.2108 -0.2111 -0.2041 -0.2155

(0.1673)***(0.1673)***(0.1672)*** (0.1705) (0.1705) (0.1705) (0.1705) (0.1705) (0.1705) (0.1705)From backward linkages 1.5844 1.5754 1.5939 0.3729 0.3739 0.3700 0.3888 0.3715 0.3680 0.3814

(0.2444)***(0.2444)***(0.2443)*** (0.2492) (0.2492) (0.2492) (0.2492) (0.2492) (0.2492) (0.2492)

ObservationsObservations 28329 28329 28326 28329 28329 28329 28329 28329 28329 28326Number of firmsNumber of firms 10393 10393 10392 10393 10393 10393 10393 10393 10393 10392Within R-squaredWithin R-squared 0.0278 0.0283 0.0287 0.6016 0.6016 0.6016 0.6018 0.6016 0.6016 0.6017Ho: Sum FDI spillovers=0 - F statisticHo: Sum FDI spillovers=0 - F statistic 3.37 3.35 3.37 1.50 1.51 1.45 1.66 1.47 1.49 1.53

Log TFPLog TFPDependent Variable:Dependent Variable: Dependent Variable:Dependent Variable:

Change in Log TFPChange in Log TFP

Mexico: Econometric ResultsMexico: Econometric ResultsExplanatory variables:Explanatory variables: Reg 1Reg 1 Reg 2Reg 2 Reg 3Reg 3 Reg 4Reg 4 Reg 5Reg 5 Reg 6Reg 6 Reg 7Reg 7 Reg 8Reg 8 Reg 9Reg 9 Reg 10Reg 10Competition from importsCompetition from importsMexican tariff on total imports -0.0050 -0.0087 -0.0085 -0.0088 -0.0110 -0.0111 -0.0110 -0.0112 -0.0106 -0.0110

(0.0022)**(0.0021)***(0.0021)***(0.0021)*** (0.0020)***(0.0019)***(0.0019)***(0.0019)*** (0.0018)***(0.0019)***Imports/industry output 0.0187 0.0092

(0.0057)*** (0.0054)*

Exporting activityExporting activityExporter -0.0088

(0.0045)**Exports/Sales -0.0111

(0.0134)US Tariff (Mx - RofW) -0.0042 -0.0048 -0.0049 -0.0050 -0.0026 -0.0025 -0.0026 -0.0027 -0.0013 -0.0025

(0.0019)**(0.0019)**(0.0019)** (0.0019)** (0.0018) (0.0018) (0.0018) (0.0018) (0.0017) (0.0018)

Imported intermediate goodsImported intermediate goodsImported inputs/Total non-labor costs 0.0554 -0.0281

(0.0146)*** (0.0136)**

FDI spilloversFDI spilloversIntra-industry -0.1439 -0.1402 -0.1450 -0.0146 -0.0129 -0.0160 -0.0116 -0.0142

(0.0533)***(0.0533)***(0.0533)*** (0.0495) (0.0495) (0.0495) (0.0474) (0.0495)From forward linkages 0.3611 0.3739 0.3637 0.2880 0.2945 0.2913 0.2533 0.2870

(0.0739)***(0.0739)***(0.0739)*** (0.0687)***(0.0688)***(0.0687)*** (0.0665)***(0.0687)***From backward linkages 1.1316 1.0759 1.1270 0.6345 0.6076 0.6316 0.6140 0.6360

(0.1629)***(0.1635)***(0.1629)*** (0.1517)***(0.1522)***(0.1517)*** (0.1466)***(0.1516)***

ObservationsObservations 26146 26146 26146 26146 26146 26146 26146 26146 25462 26146Number of plantsNumber of plants 5107 5107 5107 5107 5107 5107 5107 5107 5014 5107Within R-squaredWithin R-squared 0.0160 0.0155 0.0174 0.0158 0.3694 0.3704 0.3708 0.3701 0.3742 0.3706Ho: Sum FDI spillovers=0 - Chi2 statisticHo: Sum FDI spillovers=0 - Chi2 statistic 53.32 50.27 53.09 27.87 26.72 27.79 26.55 27.94

Dependent Variable:Dependent Variable: Dependent Variable:Dependent Variable:Log TFPLog TFP Change in Log TFPChange in Log TFP

Productivity and Integration:Productivity and Integration:Summary of Econometric EvidenceSummary of Econometric Evidence

++

Competition from importsTariff elimination + +Import penetration + +

Foreign Direct InvestmentForeign ownership of the firm + +SpilloversIntra–industry – 0 – 0Through backward linkages + 0 + +Through forward linkages – 0 + +Net effect 0 0 + +

Channel Brazil MexicoTFP level TFP growth TFP level TFP growth

Exporting activityExporter status 0Exports / sales +Mercosur exports / sales 0

–0

Preferential access to the US market + 0

Imported inputs – – + –

ConclusionsConclusions Sizeable productivity gains from integration in both Sizeable productivity gains from integration in both

Brazil and Mexico (mainly import discipline);Brazil and Mexico (mainly import discipline); How much of these gains were level or growth How much of these gains were level or growth

effect is difficult to telleffect is difficult to tell;; Signs that North-South integration was a more Signs that North-South integration was a more

powerful boost to trade and productivity than its powerful boost to trade and productivity than its South-South counterpart;South-South counterpart;

““Integration shock”, though, has not produced, so Integration shock”, though, has not produced, so far, East Asian levels of productivity growth.far, East Asian levels of productivity growth.

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