Journal Article

Trade Liberalization and Investment: Firm-level Evidence from Mexico

Ivan T. Kandilov and Aslı Leblebicioğlu

in The World Bank Economic Review

Volume 26, issue 2, pages 320-349
Published in print June 2012 | ISSN: 0258-6770
Published online November 2011 | e-ISSN: 1564-698X | DOI: http://dx.doi.org/10.1093/wber/lhr048
Trade Liberalization and Investment: Firm-level Evidence from Mexico

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  • Macroeconomics: Consumption, Saving, Production, Employment, and Investment
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Plant-level panel data from Mexico's Annual Industrial Survey is employed to evaluate the impact of reductions in tariffs and import license coverage on final goods, as well as intermediates, on firms'investment decisions. Using data from 1984 to 1990, a period during which a large scale trade liberalization occurred, a dynamic investment equation is estimated using the system-GMM estimator developed by Arellano and Bover (1995) and Blundell and Bond (1998). Consistent with theory, the empirical analyses show that a reduction in import protection on final goods leads to lower plant-level investment, whereas reductions in tariffs and import license coverage on intermediate inputs result in higher investment. Also, firms with larger import costs experience a larger increase in investment following a reduction in import protection. On the other hand, higher markup firms lower investment more aggressively following reductions in tariffs and import license coverage on final goods.

Keywords: JEL codes:; E22; F13; O16; O24; D92

Journal Article.  11891 words.  Illustrated.

Subjects: Macroeconomics: Consumption, Saving, Production, Employment, and Investment ; International Trade ; Economic Development ; Development Planning and Policy ; Intertemporal Choice and Growth

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