Multi-Product Firms, Import Competition, and the Evolution of Firm-product Technical Efficiencies

We study how increased import competition affects the evolution of firm-product technical efficiency in Belgium. We observe quarterly data on outputs (quantities sold by very detailed product categories) and inputs (labor, capital, and intermediate inputs) at the firm-level from 1995 to 2007, a period marked by stark declines in Chinese tariffs. Using Diewert (1973) and Lau (1976) we show how to estimate firm-product quarterly technical efficiency shocks allowing for interactions among the production processes for multi-product firms, without allocating firm-level inputs across the different outputs. Instrumenting import share - while not important for the signs of the coefficients - is very important for the magnitudes as the effect of competition increases tenfold when one moves from OLS to IV. We find import competition is strongly positively related to firm-product level productivity with a increase of 10% in the import share leading to a 10% gain in technical efficiency. Firms appear to be less technically efficient at producing goods the further they get from their core competence. Moreover, they respond to competition by focusing more on their core products.