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Brazil spends around 15% of GDP on different social benefits, but within these expenditures, different benefits have different social impacts. While the small conditional cash transfer programme Bolsa Familia is well-targeted to the poor and has a strong diminishing effect on inequality, pension benefits largely reach those with above-median incomes. Over many years, and as a result of different indexation mechanisms, the real value of pension benefits has increased rapidly, while conditional cash transfers have struggled to keep pace with inflation. This paper presents a simulation experiment using household data to demonstrate the significant potential that changes in the annual benefit indexation mechanism of social security benefits could have had for reducing inequality. Maintaining the purchasing power of pension benefits while shifting the increased pension spending that resulted from automatic indexation towards conditional cash transfers would have allowed significantly stronger progress in reducing inequality. This strengthens the case for rethinking the current indexation mechanism of social security benefits in Brazil.

As Brazil is significantly less integrated into international trade than other emerging market economies, opening up to trade has significant potential to create jobs that are more productive and better paid. At the same time, this will be associated with structural changes and adjustment costs. Some workers are required to move to more productive firms, change occupations, sectors or even location. In particular, low-skilled workers need to upgrade their skills to move into newly created medium-skilled jobs in expanding firms and sectors. Workers who stay in their jobs will face similar challenges as firms upgrade production processes towards more advanced technologies. Well-designed and well-funded training and adult education policies, combined with effective social protection and employment services, can go a long way to mitigate adjustment costs for low-skilled, unemployed and informal workers. Evidence suggests that training policies can make a real difference, provided that its content is aligned with skill demands in local labour markets. Moreover, the education system plays a fundamental role for preparing current and future generations for the challenges that international integration and rising digitalisation will bring about.

The recovery from the current deep recession caused by the COVID-19 pandemic will require raising productivity through structural reforms. This implies a number of challenges for economic policies. With large parts of the economy shielded from competition, firms face weak incentives to become more productive. Sizeable shares of labour and capital are trapped in low-productivity firms that survive on the back of support from distortive policies. Reallocation mechanisms such as continuous firm entry, exit or the growth of stronger firms on the expense of less productive ones appear weaker than elsewhere. Domestic regulatory burdens and market entry barriers are high, reducing domestic competitive pressures. External competition is hampered by high trade barriers that have precluded Brazil from the opportunities that an increasingly integrated world economy can offer. A fragmented tax system gives rise to one of the world’s highest tax compliance costs and a wide array of exemptions and special regimes reduces fairness and the redistribution effect of taxes. Financial markets used to be dominated by directed credit, but thanks to a successful policy reform that aligned directed lending rates with market rates, they are now undergoing a profound transformation. Challenges in contract enforcement suggest scope for changes in the organisation of the judiciary to reduce judicial uncertainty and reduce trial durations.

Ever since the early 20th century, Argentina has failed to fully reap the benefits that integrating into the world economy can offer. With exports and imports only accounting for less than 30% of GDP, Argentina is significantly less integrated into the world economy than other emerging market economies. This reflects several decades of inward oriented policies including a strategy of industrialisation through import substitution. Trading little, Argentina has also remained on the side-lines of global value chains, all of which represents significant lost opportunities for growth and well-being. This paper, based on a chapter in the 2019 Economic Survey of Argentina, analyses the potential benefits and distributional effects of a stronger integration into the global economy. It also discusses policy options for opening up and for accompanying policies to ease the transition towards a more open economy. This Working Paper relates to the 2019 OECD Economic Survey of Argentina http://www.oecd.org/economy/argentina-economic-snapshot/

The growth of India's manufacturing sector since 1991 has been attributed mostly to trade liberalization and more permissive industrial licensing. This paper demonstrates the significant impact of a neglected factor: India's policy reforms in services. The authors examine the link between those reforms and the productivity of manufacturing firms using panel data for about 4,000 Indian firms from1993 to 2005. They find that banking, telecommunications, insurance and transport reforms all had significant, positive effects on the productivity of manufacturing firms. Services reforms benefited both foreign and locally-owned manufacturing firms, but the effects on foreign firms tended to be stronger. A one-standard-deviation increase in the aggregate index of services liberalization resulted in a productivity increase of 11.7 percent for domestic firms and 13.2 percent for foreign enterprises.

Brazil's 2005 bankruptcy law reform strengthened creditor protection, resulting in a substantial acceleration of credit expansion and business investment growth. In this paper, we go beyond average effects and examine to what extent the pro-creditor reform affected the allocation of resources across firms. We find evidence that the reform was particularly effective in alleviating credit constraints for high productivity firms. After the reform, better access to credit allowed these firms to thrive on the expense of others. Our results suggest that better access to credit can improve the allocation of resources across firms, thus raising aggregate productivity.

While there is considerable empirical evidence on the impact of liberalizing trade in goods, the effects of services liberalization have not been empirically established. Using firm-level data from the Czech Republic for the period 1998-2003, this study examines the link between services sector reforms and the productivity of domestic firms in downstream manufacturing. Several aspects of services reform are considered and measured, namely, the increased presence of foreign providers, privatization, and enhanced competition. The manufacturing-services linkage is measured using information on the degree to which manufacturing firms in a particular industry rely on intermediate inputs from specific services sectors. The econometric results lead to two conclusions. First, the study finds that services policy matters for the productivity of manufacturing firms relying on services inputs. This finding is robust to several econometric specifications, including controlling for unobservable firm heterogeneity and for other aspects of openness. Second, it finds evidence that opening services sectors to foreign providers is a key channel through which services liberalization contributes to improved performance of downstream manufacturing sectors. This finding is robust to instrumenting for the extent of foreign presence in services industries. As most barriers to foreign investment today are not in goods but in services sectors, the findings may strengthen the argument for reform in this area.

In the light of recent calls for additional structural reforms in Europe, this article looks at the role that a reduction of remaining barriers for integration and competition in the EU internal ma...

We test whether the growth experience of a sample of 21 OECD countries over the past three decades is more consistent with the augmented Solow model or the Uzawa–Lucas model, by exploiting the different non-linear restrictions implied by them as regards the relationship between factor shares and speed of convergence. Using cross-country/time-series data, we specify our growth regression without imposing cross-country homogeneity restrictions on the speed of convergence and short-run parameters. Indeed, both theoretical models imply that the speed of convergence to the steady state differs across countries due to heterogeneity in population growth, technical change or progressiveness of income taxes. Our estimated speed of convergence is too fast to be compatible with the augmented Solow model, but is consistent with the Uzawa–Lucas model with constant returns to scale. Our main findings are robust to several robustness tests.

This article identifies tax policy that both speeds recovery from the current economic crisis and contributes to long-run growth. This is a challenge because short-term recovery requires increases in demand while long-term growth requires increases in supply. As short-term tax concessions can be hard to reverse, this implies that policies to alleviate the crisis could compromise long-run growth. The analysis makes use of recent evidence on the impact of tax structure on economic growth to identify which growth-enhancing tax changes can also aid recovery, taking account of the need to protect those on low incomes.

Recent theoretical work has been able to explain how even within narrowly defined industries, firms can exhibit heterogeneous degrees of participation in international commerce. Differences in productivity between firms are the principal explanation offered by theory to explain heterogeneity with respect to international commerce. In particular, theory predicts that the least productive firms will produce for the domestic market only, while better performers engage in export activities, and the top firms establish foreign subsidiaries. This paper presents an empirical test of the relationship between productivity and patterns of international trade and production. Using German firm-level data from 1996 to 2002, we test the predicted rank ordering of productivity according to firms’ trade pattern by examining the distribution functions of the three subsets of firms for stochastic dominance. Our results are generally consistent with the predictions from theory, and document significant productivity differences according to trade patterns.

This paper uses micro data from the Indonesian Census of Manufacturing to analyze the causal relationship between foreign ownership and various aspects of plant performance. It examines the implications of foreign ownership in three different contexts: entry of foreign investors through greenfield projects, foreign acquisitions and foreign privatizations. To control for the possible endogeneity of FDI decision propensity score matching is combined with a difference-in-differences approach when the latter two settings are considered. The results suggest that new greenfield entrants outperform new domestic producers in terms of productivity. They also tend to be larger, more capital intensive and more involved in international trade. Further, the findings indicate that foreign ownership leads to significant productivity improvements in the acquired plants. The improvements become visible in the acquisition year and continue in subsequent periods. After three years, the acquired plants exhibit a 13.5 percent higher productivity than the control group. The rise in productivity is a result of restructuring, as acquired plants increase investment outlays, employment and wages. Foreign ownership also appears to enhance the integration of plants into the global economy through increased exports and imports. Finally, productivity improvements and evidence of restructuring are also found in the context of foreign privatizations.

This paper investigates the relationship between the productivity of African manufacturing firms and their access to services inputs. We use data from the World Bank Enterprise Survey for over 1,000 firms in ten Sub-Saharan African countries to calculate the total factor productivity of firms. The Enterprise Surveys also contain unique measures of firms' access to communications, electricity and financial services. The availability of these measures at the firm level, both as subjective and objective indicators, allows us to exploit the variation in services performance at the sub-national regional level. Furthermore, by using the regional variation in services performance, we are also able to address concerns about the possible endogeneity of the services variables. Our results show a significant and positive relationship between firm productivity and service performance in all three services sectors analysed. The paper thus provides support for the argument that improvements in services industries contribute to enhancing the performance of downstream economic activities, and thus are an essential element of a strategy for promoting growth and reducing poverty. Copyright 2008 The authors 2008. Published by Oxford University Press on behalf of the Centre for the Study of African Economies. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.

Ce document presente des resultats empiriques sur la productivite des entreprises au Portugal et une serie de variables de politiques. L’analyse est basee sur plus de 40 000 entreprises Portugaises entre 2006 et 2011. Les resultats suggerent une influence significative de ces politiques sur la productivite des entreprises, notamment pour le nombre de procedures requises pour creer une entreprise, l’extension administrative des accords de negociations salariales, les impots et leur complexite ainsi que le nombre de procedures requises pour executer un contrat.

In the years before the economic crisis, Portugal had low growth, a decline in export competitiveness and rising imbalances that included a large current account deficit and a strong expansion of the non-tradable sector. Strengthening export performance is therefore one of the principal challenges for Portugal. A successful rebalancing of the economy is underway since Portugal started an ambitious structural reform programme in 2011, but more needs to be done to build on the recent export success. This includes both measures to improve competitiveness, such as reforms in energy and services sectors, and measures to boost productivity growth, such as tax reform, improving the performance of the judicial system and better public support for research and development. Given that exporting firms are typically the top performers in their industry, and have been so even before becoming exporters, it is important to avoid policies that could slow down the possibilities for high-performing firms to gain market share, such as the extension of collective wage agreements or the design of tax credits for research and development activities. Support for small enterprises should also be designed to benefit start-ups with a strong growth performance, as well as firms that are increasing their participation in international trade.

Brazil has made remarkable progress in reducing poverty and inequality. This reduction is explained by strong growth but also by effective social policies. Besides growth, public services and cash transfers have played the biggest role, the latter notably through the successful “Bolsa Familia” programme. Among public services, improved access to education has played a major role, allowing more Brazilians to move into better-paid jobs. However, shortages in physical school infrastructure are limiting the hours of instruction that students receive. The high drop-out rate needs to be reduced through early interventions such as expanding early-childhood education, by reducing grade-repetition and through more tailored support for those at risk. The quality of teaching could also be raised through more in-service teacher training and stronger performance incentives for teachers. Performance of public services devoted to health and transports has been mixed. Public health services are widely available but suffer from underfunding and training places for medical staff need to be expanded. The public urban transport system suffers from a shortage of investment which is urgently needed to upgrade capacity. Regarding cash transfers, the success of “Bolsa Familia” and new programmes put in place under the umbrella of the “Brasil sem Miseria” programme is remarkable but transfer payments remain too heavily focused on pension benefits. Giving more priority to “Bolsa Familia” and “Brasil sem Miseria” while limiting the real growth of pension expenditures in the future would improve the effectiveness of social expenditures for reducing poverty and inequality. This Working Paper relates to the 2013 OECD Economic Survey of Brazil (www.oecd.org/eco/surveys/brazil).

Indonesia has come a long way in improving its tax system over the last decade, both in terms of revenues raised and administrative efficiency. Nonetheless, the tax take is still low, given the need for more spending on infrastructure and social protection. With the exception of the natural resources sector, increasing tax revenues would be best achieved through broadening tax bases and improving tax administration, rather than changes in the tax schedule that seems broadly in line with international practice. Possible measures to broaden the tax base include bringing more of the self-employed into the tax system, subjecting employer-provided fringe benefits and allowances to personal income taxation and reducing the exemptions from value-added taxes. Similarly, broad-based investment credits would be a less distortive way to enhance investment incentives than selective tax holidays. Introducing a targeted, simplified tax regime for small and medium-sized enterprises, as currently planned by the government, could foster their integration into the tax system in the longer run, even if its short-run revenue potential is limited. Upgrading tax administration has made substantial progress in Indonesia since 2002, although there is still scope to improve the training of tax officers and the administration’s audit and litigation capacities, while strengthening internal control systems and enhancing the transparency of administrative decisions. The audit system could be further improved by allocating more tax audits on the basis of compliance risks. In the natural resources sector, particularly in mining, there is a case for increasing the government’s share of resource rents through higher tax rates imposed on these rents, as opposed to taxing revenues. This would imply a willingness of the government to bear a larger share of the exploration and development risk than heretofore, which Indonesia, with its improved access to international financial markets and a diversified resource portfolio, is now well placed to do. In the mining sector, a powerful rent tax regime with a large government take would serve the country better than export taxes and ownership restrictions that have been decided recently. This Working Paper relates to the 2012 OECD Economic Review of Indonesia (www.oecd.org/eco/surveys/Indonesia).

Low investment rates are limiting Brazil’s future potential growth rate. This paper analyses a number of potential reasons for these low investment rates and discusses policy options to achieve faster capital accumulation. A shortage of domestic saving appears to be a major constraint to higher investment rates in Brazil. Due to high levels of current expenditures, in particular pension entitlements, public sector saving is negative. In addition to being costly, the pension system redistributes income to individuals with relatively low saving propensities, thereby reducing private saving as well. In order to control pension expenses in the future, this paper suggests a number of parametric pension system reforms. Beyond a scarcity of domestic savings, major curbs on investment include the high level of real interest rates, whose reasons are not easy to pin down, and thin long term credit markets, which are dominated by the national development bank BNDES. Going forward, engaging commercial lenders in the provision of long term funding will be necessary to cover the country’s investment needs. This will require leveling the playing field, which can only be achieved by removing BNDES’ exclusive access to low-cost funding from a workers’ welfare fund and through budget transfers. Another factor limiting investment is the fragmented tax system, which raises firms’ compliance costs and adds to an already high tax burden. Finally, regulatory reforms, including the removal of remaining entry restrictions as well as reductions in trade protection, may reduce firms’ costs and enhance investment incentives. This Working Paper relates to the 2011 OECD Economic Review of Brazil 2011 (www.oecd.org/eco/surveys/Brazil).

This paper addresses the often neglected question of how macroeconomic risk is shared across and within economies, and identifies reforms that could contribute towards achieving more desirable risksharing outcomes. For risk-sharing across countries, the paper discusses possibilities for international insurance as well as shock-spreading and risk-mitigating policies. Within countries, it assesses the possibilities for individuals to protect their wealth, labour and capital income against various forms of macroeconomic risk and discusses the desirable boundaries between private and government-sponsored risk-sharing institutions. The paper then presents new empirical and model-based evidence about how the short-term impact of selected macroeconomic shocks (including financial crises) is shared across different groups of agents, and analyses how such distributional effects are shaped by differences in institutions. For example, individuals on low incomes, and especially young people, seem in general to lose most from adverse macroeconomic shocks. Also, it appears that across countries two broad types of institutions can be identified that facilitate risk sharing between high and low income earners, namely “social protection” and “reallocation-facilitating” institutions. Based on countries’ reliance on these types of institutions, four broad “models” of risk sharing are identified across the OECD and the BRIICS.

Using bank-level data from 38 countries, this paper examines how a range of stability-oriented regulatory policies for banking are related to competition outcomes. Based on policy indicators constructed at the OECD for eight areas of prudential banking regulation, the results do not support the view that there is a general trade-off between stability-oriented regulatory policies and competition in banking. Only stringent entry and ownership regulations seem to have an anticompetitive effect, and some areas of prudential regulation - most notably the strength of the banking supervisor – are even associated with greater competition in banking. Overall, the results suggest that stability-enhancing regulatory reform does not need to come at the expense of competition.

The eminent contributors (including Altshuler, Creedy, Freebairn, Gravelle, Heady, Kalb, Sorensen and Zodrow) investigate the beneficial directions for medium-term tax reform in the light of global developments and lessons from the latest taxation research. In addressing this issue, they review recent advances in both the theoretical and empirical tax literature and reform evidence from individual countries. Topics covered include the impact of taxes on economic performance; international and corporate taxation; personal tax and welfare systems; environmental taxation; and country-specific tax reform experiences.

We assess whether during the recent financial crisis banking systems in countries with more stringent prudential banking regulation have proved more stable. We find indicators of regulatory strength to be relatively well correlated with the extent to which countries have escaped damage during the recent crisis, as measured either by the degree of equity value destruction in the banking sector or by the fiscal cost of financial sector rescue.

This paper examines how a range of stability-oriented regulatory policies for banking and insurance are related to selected stability and competition outcomes in these sectors. Based on survey information on financial market regulation, policy indicators for eight areas of prudential banking regulation are constructed, in addition to indicators for the insurance sector. Despite incomplete information on some areas that turned out to be important in the context of the recent financial crisis, the indicators correlate well with different measures of financial stability, both during the recent crisis and beyond. Furthermore, the results do not support the view that there is a general trade-off between stability-oriented regulatory policies and competition in banking and insurance.

On attendait beaucoup des deux vagues d’elargissement de l’UE a l’est en 2004 et 2007, et le developpement du marche interieur de l’UE devait grandement dynamiser la croissance economique dans les nouveaux et dans les anciens Etats membres. Effectivement, d’enormes progres ont ete accomplis, les donnees actuelles indiquant une intensification des echanges et des flux d’IDE, un renforcement des migrations est-ouest et un environnement macroeconomique plus stable. Mais l’achevement du marche interieur progresse a un rythme inegal et on a comparativement moins avance dans les activites de services, qui representent plus des deux tiers des emplois et de la valeur ajoutee dans l’economie. Les simulations effectuees a partir d’un modele empirique montrent que des reformes qui amelioreraient la concurrence et renforceraient les echanges dans les activites de services pourraient se traduire par des gains substantiels de productivite dans les Etats membres de l’UE. Sur une periode de dix ans, la croissance predite de la productivite du travail qui resulterait d’un ambitieux programme de reformes est de l’ordre de 10 % pour le pays moyen de l’UE, et les nouveaux Etats membres tireraient encore davantage profit de ces reformes. De plus, les priorites de la reforme structurelle en vue d’un marche interieur de l’UE plus integre devraient etre les suivantes : l’elimination des obstacles qui subsistent a la mobilite des travailleurs, l’amelioration des infrastructures de transport, la reconnaissance mutuelle des qualifications et une integration plus etroite des marches dans les industries de reseau. Enfin, une utilisation plus explicite de l’evaluation comparative pourrait contribuer a accelerer les reformes futures concernant le marche interieur.

Cet article etudie le lien entre la structure de la fiscalite et la croissance economique. L’analyse empirique inclut des indicateurs sur la repartition des taxes dans des equations de croissance pour un panel de 21 pays de l’OCDE, en prenant en compte l’accumulation du capital physique et du capital humain. Les resultats montrent que les impots sur le revenu sont en general associes avec une croissance plus faible que celle associee aux impots sur la consommation et sur le patrimoine. Plus precisement, nous etablissons un classement des instruments de taxation au regard de leur lien avec la croissance. Les impots sur le patrimoine, et particulierement les impots periodiques sur la propriete immobiliere, semblent etre les plus favorables a la croissance, suivies immediatement des impots sur la consommation. Les impots sur le revenu des individus semblent etre significativement moins favorables, et les impots sur le revenu des societes ont les effets les plus negatifs sur le PIB par tete. Ces resultats suggerent que les reformes augmentant les impots sur le patrimoine et la consommation au detriment de ceux sur les entreprises seraient susceptibles d’ameliorer les perspectives de croissance economique. L’article trouve egalement les signes d’une relation negative entre la progressivite des impots sur le revenu des individus et la croissance. Tous les resultats precedents sont robustes a differentes specifications, incluant le controle des autres determinants de la croissance economique et l’instrumentation des indicateurs de taxation.

This paper uses a stratified sample of firms across OECD economies over the period 1996-2004 to analyse the effects of corporate taxes on productivity and investment. Applying a differences-in-differences estimation strategy which exploits differential effects of corporate taxes on firms with different profitability, it is found that corporate taxes have a negative effect on productivity at the firm level. The effect is negative across firms of different size and age classes except for the small and young, which may be attributable to the relatively low profitability of small and young firms. The negative effect of corporate taxes is particularly pronounced for firms that are catching up with the technological frontier. In the investment analysis, the results suggest that corporate taxes reduce investment through an increase in the user cost of capital. This may partly explain the negative productivity effects of corporate taxes if new capital goods embody technological change.

This paper investigates the design of tax structures to promote economic growth. It suggests a “tax and growth” ranking of taxes, confirming results from earlier literature but providing a more detailed disaggregation of taxes. Corporate taxes are found to be most harmful for growth, followed by personal income taxes, and then consumption taxes. Recurrent taxes on immovable property appear to have the least impact. A revenue neutral growth-oriented tax reform would, therefore, be to shift part of the revenue base from income taxes to less distortive taxes such as recurrent taxes on immovable property or consumption. The paper breaks new ground by using data on industrial sectors and individual firms to show how re-designing taxation within each of the broad tax categories could in some cases ensure sizeable efficiency gains. For example, reduced rates of corporate tax for small firms do not seem to enhance growth, and high top marginal rates of personal income tax can reduce productivity growth by reducing entrepreneurial activity. While the paper focuses on how taxes affect growth, it recognises that practical tax reform requires a balance between the aims of efficiency, equity, simplicity and revenue raising.

While there is considerable empirical evidence on the impact of liberalizing trade in goods, the effects of services liberalization have not been empirically established. Using firm-level data from the Czech Republic for the period 1998-2003, this study examines the link between services sector reforms and the productivity of domestic firms in downstream manufacturing. Several aspects of services reform are considered and measured, namely, the increased presence of foreign providers, privatization, and enhanced competition. The manufacturing-services linkage is measured using information on the degree to which manufacturing firms in a particular industry rely on intermediate inputs from specific services sectors. The econometric results lead to two conclusions. First, the study finds that services policy matters for the productivity of manufacturing firms relying on services inputs. This finding is robust to several econometric specifications, including controlling for unobservable firm heterogeneity and for other aspects of openness. Second, it finds evidence that opening services sectors to foreign providers is a key channel through which services liberalization contributes to improved performance of downstream manufacturing sectors. This finding is robust to instrumenting for the extent of foreign presence in services industries. As most barriers to foreign investment today are not in goods but in services sectors, the findings may strengthen the argument for reform in this area.

This paper uses micro data from the Indonesian Census of Manufacturing to analyze the causal relationship between foreign ownership and plant productivity. To control for the possible endogeneity of the FDI decision, the difference in differences approach is combined with a matching technique. An advantage of this novel method is the ability to follow the timing of the observed changes in productivity and other aspects of plant performance. The results suggest that foreign ownership leads to significant productivity improvements in the acquired plants. The improvements become visible in the acquisition year and continue in the subsequent periods. After three years, the acquired plants outperform the control group in terms of productivity by 34 percentage points. The data also suggest that the rise in productivity is a result of restructuring, as acquired plants increase their investment outlays, employment, and wages. Foreign ownership also appears to enhance the integration of plants into the global economy through increased exports and imports.

This paper uses micro data from the Indonesian Census of Manufacturing to analyze the causal relationship between foreign ownership and plant productivity. To control for the possible endogeneity of the FDI decision, a difference-in-differences approach is combined with propensity score matching. An advantage of this method, which has not been previously applied in this context, is the ability to follow the timing of observed changes in productivity and other aspects of plant performance. The results suggest that foreign ownership leads to significant productivity improvements in the acquired plants. The improvements become visible in the acquisition year and continue in subsequent periods. After three years, the acquired plants outperform the control group in terms of productivity by 34 percentage points. The data also suggest that the rise in productivity is a result of restructuring, as acquired plants increase investment outlays, employment and wages. Foreign ownership also appears to enhance the integration of plants into the global economy through increased exports and imports.

This paper tests some of the predictions of recent advances in trade theory that have focused on different trade patterns of firms within the same sector. Helpman, Melitz and Yeaple (2005) develop a model in which innate productivity differences between firms determine the degree of international engagement of firms: The least productive firms produce for the domestic market, better performers engage in export activities, and the top firms establish foreign subsidiaries. Using German firm-level data from 1996 to 2002, we test this prediction using non-parametric methods, by examining the distribution functions of the three subsets of firms for stochastic dominance. Rather than just comparing first moments, this technique allows us to compare productivity over the entire distribution. Our results show robust support for the prediction from theory.

This paper analyses the relationship between firm productivity and export behavior in German manufacturing firms. We examine whether productivity increases the probability of exporting, and assert that there is a causal relationship from high productivity to entering foreign markets, as postulated by the recent literature on international trade with heterogeneous firms. In estimating productivity, we control for a possible simultaneity bias by using semiparametric estimation techniques. Moreover, we apply a matching technique in order to analyze whether the presence in international markets enabled firms to achieve further productivity improvements, without finding significant evidence for this. We conclude that high-productivity firms self-select themselves into export markets, while exporting itself does not play a significant role for productivity improvements.