Technology adoption and the selection effect of trade

Abstract

The reallocation of output across plants and the productivity growth at individual plants are both\nimportant sources of productivity growth at the industry level. Recent evidence has shown that\ntrade liberalization is related to both effects. While a trade model with firm heterogeneity can\naccount for the first effect, it can not explain the second effect. We add to this model the option\nfor firms to costly adopt more productive technologies and show that plant productivity actually\nrises in response to lower trade costs. Following trade liberalization, selection into exporting\nraises the market share only for some exporters. Therefore, a greater scale of operation\namplifies their return from costly productivity-enhancement investments and leads a greater\nproportion of them to implement a more innovative technology.

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