Market size, trade, competition and productivity: evidence from OECD manufacturing industries

This article investigates empirically the links between market size, trade, competition and productivity, using a cross-section of 11 OECD countries and 11 manufacturing industries over the period 1995 to 2000. To deal with endogeneity concerns we extend the Frankel and Romer (1999) approach to construct instruments for both trade and competition. We find that larger, more integrated markets exhibit more competition (lower markups) and higher productivity, in line with the theoretical model by Melitz and Ottaviano (2005). The pro-competitive effect of trade accounts for approximately 30% of trade's total productivity effects.