Essays on Trade Policies and Firm Performance in Developing Countries

Abstract

Trade policies in developing countries have a significant impact on economic growth and welfare, especially after the trade liberation in China and India. The labor markets are highly influenced by different trade policies such as Special Economic Zones (SEZs) in China and the growing import competition in India. My dissertation focuses on understanding the effect of trade policies on firm behaviors and local labor markets in developing countries.

My first chapter explains the stylized facts about SEZs and possible explanations for the performance of zone firms. I examine the firms’ sorting and exporting behavior under this policy. SEZ exporters have the highest productivity. Firms facing high imported intermediate tariffs will select themselves into domestic firms who locate in SEZs to avoid imported input tariffs; firms become non-SEZ exporters when their intermediate inputs tariffs are low. Compared with other types of firms, domestic non-zone firms have the lowest productivity. Empirically, firms with high productivity paying high fixed costs are more likely to enter SEZs and enjoy the imported input tariff exemptions.

In my second dissertation chapter, I study a horizontal spillover effect of SEZs built in China and analyze their effects on firm productivity, wages, and labor market competition. The study shows that labor market competition is responsible for a negative spillover effect on surrounding non-zone firms. With positive assortative matching between worker skills and firm technology, SEZs shift the zone firm productivity upwards, increase wages, and are matched with a higher quality of labor. This results in a negative effect on non-zone firms with lower labor force quality and productivity. Consequently, while there is an overall positive welfare gain from SEZs, zone firms win and non-zone firms lose. The analysis shows the potential negative effects of SEZs in terms of income distribution and firm performance in many other developing countries.

My last chapter, co-authored with Rubina Verma, examines the quantitative and qualitative impact of rising imports from China on the share of informal employment in registered Indian manufacturing enterprises. The results reveal that rising imports negatively affects the share of contract labor in firm employment by primarily increasing the number of permanent workers hired. While all firms witness an increase in the number of contract workers hired, those that are located in worker-biased labor regulation regimes see a decrease in permanent worker hiring while the firms located in employer-biased labor regulation regimes see an increase in permanent workers in their workforce.