Trade, Technical Change and Market Selection: Evidence from Manufacturing Plants in Colombia

We examine various channels through which trade liberalization affects aggregate productivity, exploiting tariff changes across sectors after the Colombian trade reform. An advantage of our analysis is that our TFP measure does not include demand and price effects. We find that higher plant-level productivity reduces the likelihood a plant exits, and that greater international competition magnifies this effect. Using a dynamic simulation, we find that improved selection increases aggregate productivity substantially. Trade liberalization also increases productivity of incumbent plants and improves the allocation of activity. We find larger effects on allocative efficiency with our TFP measure than with a traditional measure including price effects.