Trade and Productivity: An Industry Perspective

We use a sample of 14 OECD countries and 15 manufacturing industries to test for the effect of trade on productivity. Endogeneity concerns are accounted for using the geographical component of trade as instrument as suggested by Frankel and Romer (1999). Our results are in line with previous studies: Trade increases productivity. What is puzzling, however, is the size of the effect: An increase in the export ratio by one percentage point increases productivity in manufacturing by 0.6 percent on average. This is less than half of the effect obtained in previous studies. We discuss likely explanations for this discrepancy.