ABSTRACT
The more recent empirical literature on trade and productivity shows that in the presence of firm heterogeneity, trade liberalization allows more productive firms to expand while less efficient firms either exit or shrink. Trade liberalization may lead to improved productivity through the exit of inefficient firms and the reshuffling of resources and outputs from less to more efficient firms. As Melitz (2003) points out, the opening up of trade may induce a market share reallocation towards more efficient firms and generate an aggregate productivity gain, without any change at the firm level. With the exit of inefficient firms, resources (labour and capital) will be freed and will move to other industries where they can be used more productively. Trade liberalization drives the process of restructuring and reshuffling of resources within and across sectors of the economy such that unprofitable activities contract while profitable ones expand.
