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Trade, Productivity and Profits: On Profit levels and Profit margins

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  • Tamminen, Saara
  • van den Berg, Marcel
  • van Marrewijk, Charles

Abstract

Do firms engaging in international trade have higher or lower profit margins? It is well-established that more productive firms engage in trading activities and as a result have higher profit levels. We use two theoretical models (the Melitz model and the Egger-Kreickemeier model) to clarify the relationship between productivity, trade activity, and profit margins and derive three hypotheses: (I) profit margins rise as productivity rises for domestic firms, (II) profit margins rise as productivity rises for trading firms, and (III) profit margins are not higher for trading firms than for domestic firms. We test these hypotheses using detailed micro-data for Finland (2005-2010) and the Netherlands (2002-2010). We find strong support for hypothesis I (in favour of the Melitz model), hypothesis II (in favour of both models), and hypothesis III (in favour of the Egger-Kreickemeier model). A propensity score matching analysis provides further support for hypothesis III.

Suggested Citation

  • Tamminen, Saara & van den Berg, Marcel & van Marrewijk, Charles, 2016. "Trade, Productivity and Profits: On Profit levels and Profit margins," Working Papers 80, VATT Institute for Economic Research.
    • Handle: RePEc:fer:wpaper:80
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    File URL: https://www.doria.fi/handle/10024/148737
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    Keywords

    profit margins; productivity; trade; International comparisons; Kansainväliset vertailut; F140 - Empirical Studies of Trade; L250 - Firm Performance: Size; Age; Profit; and Sales;
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