Cross-country evidence on the productivity effects of trade: the role of competition and country size

Using aggregate manufacturing data and a cross-section of 40 countries,
we estimate the effects of trade, competition and country size on
productivity. Endogeneity of trade and competition is accounted for
using instruments that are based on entry barriers and geographical
characteristics of the countries. We establish several empirical regularities:
(i) Both trade and competition are statistically and economically significant
determinants of productivity. (ii) The pro-competitive effect of trade
accounts for a quarter of trade’s total productivity effects. (iii) Country size
appears to play no role, once trade and competition are controlled for.
(iv) There is no evidence for a nonlinear relation between competition and
productivity or for the hypothesis that larger countries gain less
from trade.