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Using data from 85 NAICS 4 digit-level industry classifications that span the years 2004–2008, we evaluate whether productivity differentials, which have been shown to determine the decision of firms to export, affect the extensive margins of trade at the industry-level (i.e., the number of firms within an industry that engage in exporting). We use a stochastic frontier production function to derive a time-varying, industry-specific measure of technical efficiency. Employing a multi-level mixed effects model and accounting for the variance structure of the data (i.e., destination markets, industries, and time), we examine the average effect of an increase in industry-specific technical efficiency on the number of firms involved in exporting and the corresponding industry-specific deviations. Our results show that higher levels of industry-specific technical efficiency correspond with larger numbers of firms involved in exporting implying the importance of giving due consideration to approaches that focus on improving technical efficiency. Additionally, a much larger increase is observed among small-sized firms than for medium- or large-sized firms. We discuss the implications of the observed deviations, particularly for policy makers interested in increasing the extensive margins of their nations’ trade.

We show how productivity differences between foreign and indigenous firms affect the choice of the foreign market entry strategy. We identify the conditions necessary for the adoption of a particular strategy depending on the competing firms’ productivity differences as well as each strategy’s cost. In particular, we study tradeoffs between exporting and JV as well as between JV and WOS that were neglected in the firm heterogeneity literature. We find that high productivity differences led the foreign firm to enter host markets via WOS or exporting monopoly, while in the case of smaller productivity differences they entered via different types of JV. The share in joint venture depended positively on the productivity difference and negatively on trade and investment costs.

This paper extends the examination of the effects of exchange rate risk on the foreign direct investment decision of U.S. multinationals in manufacturing. It does so by explicitly developing a model which incorporates exchange rate risk into the objective function of the firm and tests the model on cross-sectional data over the years 1974 to 1977 for investment in both developed and less developed countries. These are the only years for which data on all crucial variables are available. In all cases the risk aversity hypothesis was substantiated and the same model was appropriate for both developed and less developed countries.