The Effects of Local Industry Competition and Trade on Economic Productivity: Evidence from the Mexican Manufacturing Industry

In recent years the economics literature has seen an increasing number of studies seeking to explain which factors stimulate economic productivity, including the effects of market imperfections. Those that have studied the... [ view full abstract ]

In recent years the economics literature has seen an increasing number of studies seeking to explain which factors stimulate economic productivity, including the effects of market imperfections. Those that have studied the productivity effects of local industry concentration have focused on the effects through agglomeration. This paper contributes to this literature by studying the joint effects of competition and exposure to trade on economic productivity in a developing country context. The analysis exploits a unique dataset containing concentration indices and economic productivity estimates at the 3-digit manufacturing sector for more than seventy metropolitan areas over a 20-year period in Mexico. This paper uses an instrumental variable approach for the industry concentration index which combines the initial level of market competition at the level of metropolitan areas with national trends. The results show evidence of a concave relationship between concentration and economic productivity, with a threshold level of industry concentration after which less competition has unambiguous negative effects of economic productivity. However, such negative effects of market concentration on productivity are neutralized, and depending the sector reversed, when certain sector has a high exposure to external markets.