Premium
Trade, productivity and profitability: On profit levels and profit margins
Author(s) -
Berg Marcel,
Marrewijk Charles,
Tamminen Saara
Publication year - 2018
Publication title -
the world economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.594
H-Index - 68
eISSN - 1467-9701
pISSN - 0378-5920
DOI - 10.1111/twec.12630
Subject(s) - profitability index , profit (economics) , gross profit , profit margin , economics , productivity , propensity score matching , monetary economics , microeconomics , macroeconomics , finance , statistics , mathematics
Abstract Do firms engaging in international trade have higher or lower profit margins? It is well established that more productive firms engage in trading activities and as a result have higher profit levels. We use two theoretical models (the Melitz model and the Egger–Kreickemeier model) to clarify the relationship between productivity, trade activity, and profit margins and derive three hypotheses: (I) profit margins rise as productivity rises for domestic firms; ( II ) profit margins rise as productivity rises for trading firms; and ( III ) profit margins are not higher for trading firms than for domestic firms. We test these hypotheses using detailed micro‐data for Finland (2005–10) and the Netherlands (2002–10). We find strong support for Hypothesis I (in favour of the Melitz model), Hypothesis II (in favour of both models) and Hypothesis III (in favour of the Egger–Kreickemeier model). A propensity score matching analysis provides further support for Hypothesis III .