The impact of globalisation on firm performance and wages in an emerging economy context

Abstract

We analyze the impacts of globalisation on firm performance and firms‟ relative wage payments in an emerging economy context. Using a rich set of manufacturing firm census data for Chile, we study four specific empirical issues, (1) the impacts of foreign direct investment in services on firm total factor productivity (TFP) growth, (2) the heterogeneous effects of import competition on firm TFP, (3) the effect of import competition on firm product upgrading and, (4) the question whether trade had an impact on decreasing relative manufacturing wages. The analysis exploits the panel nature of the dataset, an exogenous measure of import competition – transport costs – and, most importantly, the availability of detailed information on firms‟ products and their prices to investigate these questions rigorously. Specifically, we use the latter information to compute improved TFP measures, analyze product upgrading with a direct quantitative measure - unit prices of firms‟ products – and assess the impact of price changes on wages not only by industry but equally at the firm level. We find an overall positive impact of import competition on firm performance – both on TFP improvements and product innovation. Moreover, results show a positive and significant effect of foreign direct investment in services on TFP growth. However, our results also suggest that globalisation alone may not be sufficient a tool for development. While import competition has a strongly positive impact on product upgrading, we do not find that competition from developed countries stimulates such innovation. The gap between both types of economies may be too large. Also, the overall positive impact of import competition on firm TFP is lower for smaller firms; they will not benefit to the same extent as larger firms. Finally, we find that price effects of trade do not explain the observed reduction in manufacturing wage inequality.