Testing the Linkages between Trade and Productivity Growth

The authors examine the effect of trade on productivity growth using data from nine manufacturing industries across 12 OECD countries over the period 1978-97. Because causality between productivity growth and trade share runs both ways, geographical characteristics of countries are used to instrument for average bilateral trade volumes over the 20-year period. In addition, to exploit the time-series nature of the data, the authors construct a panel dataset and employ dynamic panel data techniques. After controlling for industry-specific heterogeneity, the results indicate that increased exposure to trade, in particular higher import volumes, exerts a positive influence on industries' productivity growth. However, the effect is rather small. Copyright © 2008 The Authors. Journal compilation © 2008 Blackwell Publishing Ltd.