Productivity and foreign competition

The debate in Italy on the recent disappointing performance of GDP growth has focused on the increasing competitive pressure exerted by firms located in the developing countries and specialized in key product sectors of Italian manufacturing. This paper contributes by explicitly quantifying the effects of this competition on the efficiency of Italian manufacturing firms and sectors. The exercise exploits the exogenous nature of the entry into international markets of competing firms located in developing countries, largely attributable to trade liberalization policies and the initial forms of industrial development. The relation between the developing countries� market shares and sectoral productivity in Italy, both disaggregated according to the 3-digit Ateco91 classification, is found to be empirically positive. The effect is largely due to a process of creative destruction in which the least efficient firms exit the market and new firms of above-average efficiency enter.