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Microeconomic Flexibility, Creative Destruction and Trade

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  • Pineda, José
  • Blyde, Juan S.
Abstract
We investigate whether greater microeconomic flexibility facilitates the process of creative destruction in the context of new trade models with heterogeneous firms (Bernard et al., 2003 and Melitz, 2003). In these models, freer trade increases aggregate productivity because high-efficiency firms expand through exporting and low-efficiency firms exit the market. However, factor reallocation could be negatively affected by the presence of microeconomic frictions. We use these insights of the theory to analyze whether a reduction in trade costs increases the probability of becoming an exporter relatively more in industries with greater microeconomic flexibility and whether plant exit driven by trade costs declines is more likely in industries with lower frictions. Using plant level data from Venezuela, we report results supporting these predictions.

Suggested Citation

  • Pineda, José & Blyde, Juan S., 2009. "Microeconomic Flexibility, Creative Destruction and Trade," IDB Publications (Working Papers) 2546, Inter-American Development Bank.
    • Handle: RePEc:idb:brikps:2546
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    References listed on IDEAS

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    More about this item

    Keywords

    IDB-WP-150;

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

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