Since the 1970s, Uruguay has been engaged in a trade openness and a regional integration process to improve economic growth, through MERCOSUR (Mercado Común del Sur or MERCOSUR) – a trade bloc agreement among Argentina, Brazil, Paraguay, Uruguay, and Venezuela. This study analyzes the impact of trade openness and regional integration, on manufacturing firms’ performance. Specifically, this study uses data from the period 1983-2005 to analyze the relationship between trade policy and the trade-orientation productivity and survival of firms. It follows a three-step estimation strategy to assess differences between firms regarding their trade orientation, estimating the firms’ productivity, regressing productivity estimates on firm-specific protection measures, and evaluating the effect of trade policies on firms’ survival.
The findings indicate that productivity reduces the risk of exit (more productive firms have lower hazard rates). This reveals the existence of an underlying selection process by which inefficient (low-productivity) firms exit the market. The study also found that, for most firm classes, the effect of tariffs on survival probabilities is not statistically significant, while non-tariff protection has a significant positive impact on firms’ survival. In both cases, the exception are extra-MERCOSUR-oriented firms, which show a significant negative association between lower input tariffs and the risk of exit, and no significant effect of NTB's.
The study adds to our understanding of the determinants of Uruguayan manufacturing firms’ performance in the face of trade policy changes implemented there in the last three decades. Possible future research includes evaluating the impact of exchange rate policy, taking into account its implications in terms of protection levels and competitiveness.
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