Market concentration, trade exposure, and firm productivity in developing countries: Evidence from Mexico

•This paper studies the effect of local competition and trade exposure on firm productivity;•Exploits several rounds of economic census data for Mexico to estimate firm productivity and local market concentration and export competition;•Finds that a decline of 10 points in local HHI (a measure of co...

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Bibliographic Details
Published in:World development 2023-05, Vol.165, p.106199, Article 106199
Main Authors: Rodríguez-Castelán, Carlos, López-Calva, Luis Felipe, Barriga-Cabanillas, Oscar
Format: Article
Language:English
Subjects:
Instrumental variables
Market concentration
Productivity
Trade exposure
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Summary:•This paper studies the effect of local competition and trade exposure on firm productivity;•Exploits several rounds of economic census data for Mexico to estimate firm productivity and local market concentration and export competition;•Finds that a decline of 10 points in local HHI (a measure of concentration) of the manufacturing sector explains an increase by 1 percent in the total factor productivity (TFP) of revenue.•Shows that greater exposure to export competition offsets the negative effects of local concentration on productivity.•Explores differential responses of formal and informal firms when facing greater competition and exposure to international markets. To show how local market concentration affects firm productivity, we exploit a rare database for developing-country standards consisting of five rounds of the Mexican Manufacturing Census and geographically disaggregated data on sectoral exports. Our estimates show that a decline by 10 points in the Herfindahl-Hirschman index, a measure of market concentration, explains an increase by 1 percent in the total factor productivity (TFP) of revenue. We also find that greater exposure to trade offsets and, in most cases, reverses the negative effects of local concentration on productivity. Our heterogeneity analysis also shows that informal firms exhibit a higher probability of exiting the market if competitive pressure and exposure to international markets increase and that firms in the southern region of the country would benefit the most from higher competition and exposure to international markets.
ISSN:0305-750X
1873-5991
DOI:10.1016/j.worlddev.2023.106199