Multi Product Firms, Import Competition, and the Evolution of Firm-product Technical Efficiencies

We study how increased import competition affects the evolution of firm-product technical efficiencies in the small open economy of Belgium. We use a production survey where we observe quarterly firm-product data at the 8-digit level on quantities sold and firm-level labor, capital, and intermediate inputs from 1997 to 2007, a period marked by stark declines in tariffs applied to Chinese goods. We extend the methodology developed in Dhyne et al. (2020) to estimate firm-product measures of productivity. We find that a 1% increase in the import share leads to a 1.05% gain in technical efficiency. This elasticity translates into gains from competition over the sample period exceeding 1.2 billion euros, which is over 2.5% of the average annual value of manufacturing output in Belgium. Firms appear to be less technically efficient at producing goods the further they get from their “core” competency product and firms respond to competition by focusing more on their core products. Instrumenting import share - while not important for the signs of the coefficients - is very important for the magnitudes as the effect of competition increases tenfold when one moves from OLS to IV.