Returns to Scale, Productivity, and Markup: Revisit the Export Premium

Abstract

<p>The productivity effect of export has been the foundation for many trade-related policies. However, empirical studies typically detected limited productivity effect of export. Recently, Garcia-Marin and Voigtl¨ander (2019) shows that this may be because increased productivity after export caused a reduction in output prices, offsetting each other in the revenue productivity measure. We show that increasing returns to scale is an important source of efficiency gains from export, which is almost equally important as the productivity channel. Moreover, export increases markup and profitability. Ignoring markup also underestimates returns to scale, muting an important source of gains from export. Because output prices are typically unavailable in most micro datasets, we develop a new method to consistently estimate firm-level markup, productivity, and returns to scale jointly, using widely available revenue and inputs expenditure. We show that export has substantial efficiency gains, half of which is contributed by increasing returns to scale and the other half by export's productivity premium. The improved efficiency allows exporters to charge a higher markup but at a lower price. All together, firm profit increases by about a quarter after export in the Chinese manufacturing industry; consumers also benefit from lower prices.<br></p>