A Firm's Capacity Utilization and Its Relationship with Foreign Competition in Selected Countries
This study investigates the effects of foreign competition on the level of capacity utilization of a firm using firm-level data of twelve countries.. Until recently much of the work on competition and trade had focused on measures of productivity. This paper does not examine the final result of openness and competitive pressures (by measuring productivity) but focuses on the mechanism that would make this possible in the first place, i.e. better use of a firm's resources. The results show that capacity utilization is higher for exporter firms. Moreover, increasing the level of exports also affects capacity but at a decreasing rate, indicating that if exporting more than 49 or 51 percent of total sales, capacity utilization starts to go down. Other findings suggest that more flexibility to make factor choices can positively affect capacity utilization. Increasing openness and promoting exports may induce firms to export and therefore use resources more efficiently but policy makers can move beyond reducing barriers to trade and try to build around other incentives that increase capacity utilization. Allowing firms more flexibility to make factor choices by reducing strict labor regulations can positively affect capacity utilization as well as providing training for workers.
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